Common Areas in a House Hack (Taxes)

[Joel Johnson]

I just purchased a new, larger home. I am house hacking and renting out one of the rooms. I use TurboTax for my taxes every year and they want to know what percentage of my home is being rented? Do I get to count any of the common areas as rental space? Should I not go with TurboTax and use a pro? This is really the only situation that is somewhat complicated about my taxes right now.

[Linda Weygant]

Originally posted by @Ashish Acharya:

Originally posted by @Joel Johnson:

@Linda Weygant That is exactly what I was looking for! Thank you so much.

I have to slightly disagree with the Linda. Linda, please correct me If you think I am wrong. 

Dont want to make this more complicated because as a small taxpayer we sometimes have to be practical rather than following every single ruling out there. However, we should rather be conservative vs aggressive when we know there are rules disallowing the deduction. 

Normally renting a personal use house falls under the vacation home rule(Sec 280) that says you cannot have a loss from the operation. Your net rental expense is limited to rental income. 

However there is an exception(Hotel exception) to this rule when you have a room rented out exclusively throughout the year, the rental activity does not fall under the limitation of sec 280. 

However, the common area expenses do not fall under this exception and deduction will have to be limited to the income of the property.

There is a court case for this ( Anderson). This is what it says "petitioners misread the exclusive-use rule of the Hotel Exception. Thereunder, as explained, only the portion of petitioners' Inn used solely and exclusively in the business of operating the bed and breakfast is treated as business property. The dual-use portion of the Inn, because it was used partially for personal purposes, does not fall within the Hotel Exception, is not removed from the general definition of a dwelling unit, and related expenses are not excepted from the general disallowance rule of section 280A(a)."

To my point, it ok to not deduct anything related to a common area to be more conservative if this will be an administrative burden but wouldn't recommend being aggressive deduct to create a loss. 

Excellent points, Ashish.  

In general, I tend to treat "house hacking" as Business Use of Home, utilizing form 8829, but it can and does depend on facts and circumstances.  Hotel rules generally come into play when there are significant additional services being included in the rent, such as daily maid service, meals, provision of transportation, provision of personal items such as towels, soap, etc.  The vast majority of house hacks provide none of this to the roommates.  

Also, as per your paragraph above, most house hackers are NOT attempting to state that they are operating a Bed & Breakfast.  The taxpayers in the case you mentioned were stating that, so I don't think the facts and circumstances are at all similar.

To be clear - to me, a house hacker is a person who has long term leases with their roommates and charges rent (or rent plus utilities) in exchange for a place for the tenant to live permanently.  The court case you mention seems to be more in line with taxpayers who are renting out bedrooms on AirBNB, in which case I would definitely include ONLY the actual space allocated to guests and which the taxpayer does NOT utilize or access except to clean the room, refresh linen, etc.

I don't see that vacation home rules come into play at all in a house hack.  We're talking a house you live in full time and which you also rent out full time in long term contracts, not a separate house that you rent out and then also stay in more than 14 days.  I see this as completely irrelevant to a house hack scenario.