I rent out a room in my primary residence. While I actively manage this room rental, am I allowed to deduct a net loss since I use it for personal use as well?

Forum|Forum|6 years ago
January 25, 2020
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For example, should I select "no, I am not an active participant in this rental property" when prompted by turbo tax? If so, will the not loss I could have deducted this time be rolled over into another year?

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Carl11_2

Employee

For example, should I select "no, I am not an active participant in this rental property" when prompted by turbo tax?

Absolutely not. That would be a lie and you would be committing tax fraud.

If so, will the not loss I could have deducted this time be rolled over into another year?

That's how it works with rentals. It is extremely rare for rental property to ever show a profit "on paper" at tax filing time. Since rental income is passive, rental expenses (including depreciation) can only be deducted from that passive rental income. Once those expenses get your taxable rental income to zero (they practically always do) any remaining losses are carried over to the next year. As the years pass, you'll note that your carry over losses will just continue to grow and accumulate.

You can not realize those losses until the tax year you sell or otherwise dispose of the property. In the year you sell here's how it works for any gain realized on the sale.

- First, all prior depreciation taken is recaptured and taxed anywhere from 0% to a maximum of 25%. This is required by federal law.

- Next, all unrealized losses are deducted from the sales gain, thus reducing the taxable portion of any gain you may have realized.

- If unrealized losses reduces your taxable gain on the sale to zero, then any remaining losses are deducted from other ordinary income, such as W-2 income.

You can claim a maximum of $3000 against other ordinary income. If you have more than that, then it's just carried forward each year until all used up.

Hal_Al

Employee

Q. Am I allowed to deduct a net loss since I use it for personal use?

A. No. And you have identified the reason: you have personal use.

If this is merely a cost sharing arrangement where the amount paid is below fair market rental, there would be no reportable income to you. If the “rent” amount is fair market value, or more, there is still some question as to whether you even have to report it, as it almost always comes out zero. Most people take the attitude that it is not income; it's just room mates sharing expenses and ignore it. Family, as opposed to unrelated roommates, makes that position stronger.

Even if you report the rent received as income (on Sch. E), your deductible expenses will most likely exceed your income, so you'll have no net taxable income.. Because this is your personal residence (in addition to being a rental property); and you use it most of the year (the 14 day or 10% rule), you are precluded from claiming any rental losses. You are only allowed to deduct expenses up to the amount of the income. Almost everybody in your situation comes out with a zero sum for tax purposes.