To calculate rental expenses for a property in which you live in one part and rent out the other, first calculate the percentage of the rental portion by figuring the square footage of that part compared to the square footage of the entire property. Apply this percentage to each expense and enter those amounts as the rental expenses. For the depreciation to calculate, apply the same percentage used previously to the cost basis and this should allow the correct amount of depreciation to calculate for Schedule E (Form 1040) Supplemental Income and Loss.
The mortgage interest and/or real estate taxes applicable to the rental portion would be entered on Schedule E; however, the mortgage interest and/or real estate taxes applicable to the portion of the property you lived in would be eligible to be entered on Schedule A (Form 1040) Itemized Deductions.
For more information, go to IRS Publication 527 Residential Rental Property (Including Rental of Vacation Homes).
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