J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

9.4 Reporting Rents From a Multi-Unit Residence

If you rent out an apartment or room in a multi-unit residence in which you also live, you report rent receipts and deduct expenses allocated to the rented part of the property on Schedule E of Form 1040 whether or not you itemize deductions. You deduct interest and taxes on your personal share of the property as itemized deductions on Schedule A of Form 1040 if you itemize deductions. If you or close relatives personally use the rented portion during the year and expenses exceed income, loss deductions may be barred under the personal-use rules (9.7).

EXAMPLE

You buy a three-family house in March 2012. You occupy one floor as your personal residence and starting in June 2012 you rent out the other two floors. The house cost you $300,000 ($270,000 for the building and $30,000 for the land). Two-thirds of the basis of the building is subject to depreciation, or $180,000 (²/₃ of $270,000). For a building placed in service in June, the depreciation rate is 1.970%, as shown in Table 9-1, so your depreciation deduction is $3,546 (1.970% $180,000). Assuming you paid property taxes of $6,000, mortgage interest of $3,900, and repairs of $3,000, this is how you deduct expenses for 2012:

Table 9-1 Depreciation: Use the Row for the Month the Residence Is Ready for Rental in the First Rental Year

The taxes and interest allocated to personal ...