Tax Schedule E Questions for Active Participation Loss

[David Y M.]

Current Situation 

- Trying to tax plan for 2020 tax year

- househacking with SO and 3 other roommates, and planning to claim active participation and claim a deductible passive loss

- Deductible expenses are based off formula Shared Living Space/ Total Living space = 3000/3250 = 92%.

Seems to me it'd be super beneficial to use this to our advantage, and make some improvements on the house since likely we won't be able to take advantage of this tax rule if we get married and our combined income is over the threshold. Is my thinking correct or are there more nuances I am overlooking?

Questions: Would these be allowed for schedule E? I plan to talk to a CPA later but want to at least try on my own first and see what might be able to fly.

- If I own the house and make her pay me $1/month to live at the house is that technically allowed? What would be reasonable since we are not married.

- What expenses are considered okay to not have explicit documentation for such as a receipt? - like for these under $50 home depot runs, supplies/tools that I buy on facebook marketplace/craigslist, or mileage runs that I don't have documentation for. Would IRS consider this okay if the expenses seemed reasonable?

- For the safe harbor/de minimus tax rule of $2,500 --> does this only apply to personal property, or can it apply to contract labor such as painting the outside of the house?

[Linda Weygant]

You need to stop reading whatever you're reading that has created these ideas or smoking whatever has brought these pipe dreams and actually consult with a qualified tax professional.

You're off the rails in so many different ways that just trying to organize my thoughts to address anything would require a complete re-education of pretty much everything you're thinking.

Quickly though...

Active participation in a home you're house hacking and currently living in does not create a deductible loss.  At the most you can deduct your expenses down to zero, but not beyond.  You'll need to move out of the property to create a deductible loss.

Your deductible percentage - when you're sharing common areas is based on the percentage of square footage that is solely rented (you have no rights to enter unless you are performing a landlord duty) vs the total percentage.  You don't include the common/shared areas as "business usage"

What do you think you're accomplishing by charging $1 of rent?  I don't follow the logic on this at all.

There is no such thing as a "deminimus" expense where you don't have to have receipts.  In the event of an audit, every deduction will need to be substantiated.  The deminimus type expense you're thinking of is a completely different concept used in a different type of business and is usually related to travel expenses.

The IRS has no concept of "this deduction is allowable because it seems reasonable".  I actually laughed out loud for real reading this and spewed coffee.

The safe harbor rules are fairly complex and I'm not sure you're ready for the nuances of that discussion given your lack of knowledge in the fundamentals.