The method for allocating shared expenses between personal and business use depends on the type of property and situation involved.
Rental Property with Personal Use:
When you rent out a portion of property while using another portion personally, any reasonable allocation method is allowed. Common approaches include dividing expenses by the number of occupants or by square footage. For example, if you rent out a 180 square foot room in an 1,800 square foot home, you can allocate 10% of expenses like utilities to the rental. [1]
Mixed-Use Rental Property:
For property rented part of the year and used personally part of the year, the IRS method allocates expenses based on days of use. The formula is: Days Rented divided by (Days Rented plus Personal Use Days) equals the Rental Percentage. Deductions follow specific ordering rules: first mortgage interest and property taxes, then operating expenses like utilities, and finally depreciation. [2]
Business Use of Home:
For items used both personally and for business (like computers or internet service), you must allocate costs between personal and business use. A reasonable allocation method should be applied consistently. For example, internet costs can be allocated using the same business percentage determined for the computer itself. [3]
The key is using a reasonable and consistent method that accurately reflects the actual business versus personal use.
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