How can I allocate indirect expenses associated with renting part of primary residence?

[davetodd11]

I have a client who rents out a portion of their home.  I am trying to allocate all direct expenses to the Schedule E, as well as a portion of indirect expenses (insurance, mortgage interest, taxes, utilities).  Based on square footage of the rental portion compared to total house, and the number of days rented, I have calculated the applicable portion to be 15%.  Depending on how I post the Form 1098 (either as Main Home or Rental Activity), and link it to the Schedule E, the taxes and interest either show up entirely on the Schedule A or Schedule E.  Without actually overriding these figures, what is the proper method for posting a portion of these expenses to both the Schedule A and Schedule E?

[TaxGuyBill]

You can either manually enter the amounts (there is no need to enter the actual 1098), or better yet, check the box on the Schedule E Worksheet for "Owner Occupied" rental, and enter the percentage there.

[davetodd11]

I did try using the "Owner-Occupied Rentals" portion of the Sch E worksheet, but then it wants to apply that same percentage to all of the direct expenses as well.  And for some reason, if I change the percentage in column (b) for a particular expense, the worksheet completely ignores this override and always post the column (c) amount based on the percentage in the column (b) header - not what I indicate in column (b) for the individual expense.  

[TaxGuyBill]

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@davetodd11 wrote:

I did try using the "Owner-Occupied Rentals" portion of the Sch E worksheet, but then it wants to apply that same percentage to all of the direct expenses as well.  And for some reason, if I change the percentage in column (b) for a particular expense, the worksheet completely ignores this override and always post the column (c) amount based on the percentage in the column (b) header - not what I indicate in column (b) for the individual expense.  

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Changing the percentage works for me.  Sometimes it takes a few seconds to trigger, but it works for me.  Try changing it, then restart the program and see if that triggers it.

[davetodd11]

No joy.  The override percentage is still showing in column (b), but the amount in column (c) is still the same as the original in column (a).

[TaxGuyBill]

Just to check we are on the same page, there is no "override", you just type in the percentage, right?

You are using ProSeries, right?

Can you post some screenshots of your Schedule E Worksheet (be sure any private information is not  posted).  That may help us to figure out what is going on.

Oh wait ... did you enter any personal days?  That may be what is going on.  You should enter 365 rental and zero personal days (assuming it was rented all year).  Even if it was not rented all year, you need to enter zero personal days, but then manually calculate the proper percentages.

[rbynaker]

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@davetodd11 wrote:
Based on square footage of the rental portion compared to total house, and the number of days rented

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In my experience, ProSeries can handle ONE allocation pretty well (space OR time).  But if you have TWO allocations (space AND time), you're better off on a spreadsheet and then just manually enter the resulting numbers on A and E.

[davetodd11]

I used a spreadsheet to come up with the single multiplier of 15%.  Was hoping that having just that one allocation, ProSeries would be able to handle the divvying up of the indirect expenses.  However, it does not seem to want to accept the % overrides I'm putting in the Expenses section.  It allows me to enter the %, but then completely ignores it when calculating what should appear on Sch E as an expense.  I really expected better of this program.

[davetodd11]

I entered 168 days rented and 0 days personal, but it is still ignoring my override percentages.  I closed out and restarted the program and also clicked F9 to "Calculate Return", but nothing seems to have any affect.  I'm wondering if there is a setting somewhere in the program that I inadvertently changed, but I can't find one.

[davetodd11]

Correct - I am just entering the % in column (b) ("Enter % if not 100.00") of each applicable indirect expense.  I am using ProSeries 2019.  Not sure how to post a screen shot.

[TaxGuyBill]

This is what my screen looks like.  I entered 60% for the owner allocation, but then I entered 40% for each item, and it is using 40%.   The second picture at the bottom (they are switched) shows what I entered on the top of the worksheet.

Does yours not do this?

[davetodd11]

The difference was that I did not have the "allocate personal use items to Schedule A".  If I click that, the percentages in the Sch E expense lines change, but the 1098 info will only appear on either the Sch A or Sch E, depending on whether I've checked Main Home or Rental Activity on the 1098.  What I'm trying to do is have the 1098 in the return, and just allocate the appropriate portions of taxes and interest to the Sch A and Sch E. 

If I select Rental Activity on the 1098 and link the data to my rental's Sch E, the entire portion goes to the Sch E.  I can then enter 15% on the Sch E expense line and deduct just the applicable portion, but the balance is not showing on the Sch A.  If I select Main Home on the 1098, it all goes to the Sch A.  Isn't there some way for me to enter the data on the 1098 and direct the applicable portions to both schedules?

[TaxGuyBill]

I guess I'm not  sure.  I've NEVER used a 1098 worksheet in the program, as there is no point in doing so.  Just enter the dollar amounts where they belong.

[davetodd11]

I prefer to have as much info in ProSeries as possible, as opposed to tracking it offline in a spreadsheet in order to split it out manually.  What I envisioned in using the 1098 worksheet was that that would allow me to enter the data in once and the program would allocate it based on the percentages I set in the Sch E.  That is what I thought the "allocate personal use items to Schedule A" checkbox would do for me.  If that in no way affects the Sch A, then I'm not sure why they entitled it as they did.

[TaxGuyBill · Accepted solution]

I guess I don't know how the 1098 is supposed to work, but as you've pointed out, it appears to be lacking.

But there is no need to manually split anything.  If you just enter the full dollar amounts on the schedule E, and it will automatically send the personal amounts to Schedule A (assuming you check the allocate box).  Try it without that 1098 worksheet and I think you'll see it works fine.

[davetodd11]

I removed the 1098 worksheet, clicked the "allocate... to Schedule A" box, and entered 15% for the Percentage of Rental Use.  It properly posted the real estate taxes and interest between the 2 schedules.  The only issue with this method is that I will have to change the % for each direct expense to 100% in order to override the default 15%.  I would not have expected to enter the data on the Sch E and have it back feed to Sch A.  I would have expected it to be the other way around if anything.

Thanks.

[TaxGuyBill]

As you may have noticed, some of the rent-only categories (such as advertising) automatically go to 100% unless you manually type in another amount.  But yes, other categories you will need to manually enter a percentage.

[davetodd11]

I actually didn't, but I do see that now.  Curiously, Cleaning and Maintenance, Repairs, Supplies, and Other Expenses don't prepopulate to 100%, but Depreciation does.  Guess I'm just going to have to really pay attention to that allocation % column.

[TaxGuyBill]

Except for depreciation, all of those other categories could easily apply to both the personal portion and rental portion, which is why they don't automatically go to 100%.

A note about depreciation:  It does revert to 100% because you are supposed to enter the business percentage on the Asset Entry Worksheet.  So the allocation percentage does not affect depreciation.

[davetodd11]

Makes sense.  I was waiting on the cost basis info from the client and hadn't yet generated the asset worksheet.  I see the Percentage of Business Use line at the top of the sheet, so I'll be sure to enter that.  This is the first owner-occupied rental I've dealt with.  All my others are 100% rentals.

[Clpankau]

I saw this and looked and cant see owner occupied anywhere on ProConnects schedule E...where is it??I am having the same issue with an owner renting out 25% of property

[mickey]

What if the mortgage debt is $2M?  They rent 15% of their home out.  How to handle the $750K limit on the mortgage debt rule?  This is a husband/wife duo, not joint tenants.

[dkh]

@mickey  you'll have better luck at getting an answer if you start a new post.   This post was started 2yrs ago.

[mickey]

What happens and what to do if they purchased their home during 2019 and their mortgage debt is $2M?

I want to say I could just put the entire mortgage interest on schedule E and let it pro-rate to schedule A based on rental %.  I wonder if this is allowed as it's partly for business usage, meaning do I have to apply the $750K limit.  If so how should this be done?

A corporation is renting out part of their home as office for one of the shareholders.