Depreciation and Capital Gains on a Primary with rented Bedrooms

[Account Closed]

I purchased my first SFH home this last year that I have moved into as my primary and I am renting out the extra bedrooms in the house. I have been trying to read exactly how renting out the bedrooms will effect my taxes and have been reading some conflicting information based on the post so thought I would make a new post with what I currently understand to make sure it is correct.

1. As far as expenses go if I say 1/3 of the house is a rental I can deduct 1/3 of most expenses and 100% of any expense related directly to the tenants.

2. Since part of the house is a rental I can take depreciation on that 1/3 of the house value. From what I understand whether or not I take the depreciation I will have to recapture it no matter what so I might as well take the depreciation. Is this correct?

3. Since this is my primary and is a single family home not a multifamily. If I live here the minimum 2 years and then sell within 5 I can still take the entire capital gains exemption, I won't have to pay capital gains on that 1/3 that was rented correct?

Thanks in advance for the help.

[Natalie Kolodij]

Originally posted by @Account Closed:

I purchased my first SFH home this last year that I have moved into as my primary and I am renting out the extra bedrooms in the house. I have been trying to read exactly how renting out the bedrooms will effect my taxes and have been reading some conflicting information based on the post so thought I would make a new post with what I currently understand to make sure it is correct.

1. As far as expenses go if I say 1/3 of the house is a rental I can deduct 1/3 of most expenses and 100% of any expense related directly to the tenants.

2. Since part of the house is a rental I can take depreciation on that 1/3 of the house value. From what I understand whether or not I take the depreciation I will have to recapture it no matter what so I might as well take the depreciation. Is this correct?

3. Since this is my primary and is a single family home not a multifamily. If I live here the minimum 2 years and then sell within 5 I can still take the entire capital gains exemption, I won't have to pay capital gains on that 1/3 that was rented correct?

Thanks in advance for the help.

If 1/3 of the square footage is actually an appropriate rental % (We woudl also need to allocation a fair portion of living room, kitchen, other areas they have access to) 

Then you get to deduct 1/3 of the home expenses to Sch E related to this rental space you're now essentially making 1/3 of your primary house a rental. That 1/3 is now business use, and is no longer your primary. 

You do in fact need to take depreciation on that 1/3. 

And when you sell that 1/3 of gain won't qualify for the 121 exception because you've turned it into a rental. It was no longer your primary. Just because it's physically the same building doesn't matter. You can combine a 121/ 1031 for this purpose. 

If your gains when you sell at 300k 

$200k will be excluded under 121 exemption 

$100k will be taxable sine it wasn't your primary, you made it a separate income producing business asset