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I am purchasing a 1700 square foot townhouse for $100,000. I am considering renting out a room. The room is 132 sq ft and the rest of the house would be shared space. The rent would be $500 a month. How would this impact Minnesota state and federal income tax returns? What expenses can I deduct as far as renting is considered?
ANSWER
Expert Carlton Melton's Answer:
If you were to rent out a room in the townhouse, the impact on your federal taxes would be determined by whether there was net income or net loss from the rental activity. There will be either an increase or decrease in your total income, adjusted gross income (AGI), and taxable income depending on the amount of income that you receive, and the amount of the expenses related to the rental activity.
You will be allowed to deduct a proportional amount of the expenses related to the rental portion of the home. You will have to prorate the expense deductions for the amount of time that the room is used as rental property, if it is not rental property on January 1st.
You will be able to deduct rental expenses for the portion of the year that the property was rented on Schedule E. Some of these expenses include a proportional amount of electricity, water, home mortgage interest, qualified mortgage insurance premiums, real estate taxes, cleaning and maintenance, repairs, and depreciation on the rental portion of the house and the furniture and equipment used for rental purposes.
The expenses related to the unrented portion of the home that are usually not deductible remain nondeductible except for those that can be taken on Schedule A if you itemize your deductions.
The rental activity will only effect your Minnesota return indirectly since your federal AGI and your federal taxable income are reported on the Minnesota Form M1. The effect that the additional income and deductions has on your federal return will be reflected on your Minnesota return.
Thank you,
Carlton Melton
