• Page :
  • 1
  • Text Only
Voting History
rated:
I've reviewed a number of tax documents and I still can't quite figure out how to handle a situation in which I own a property AND live in one bedroom. I have a roommate that pays me rent and lives in a 2nd bedroom.

I know I need to report the rental income but I want to understand what I can deduct:

1) How much of my mortgage interest is deductible?
2) Will I be able to deduct depreciation? If so, how does that affect me when I eventually sell my house?
3) How much of the utilities, repairs, etc will I be able to deduct?
4) Is my maximum deduction equal to the amount of rent I receive?

Any help would be much appreciated.

Member Summary
Most Recent Posts
Yes, that can be tricky.

xoneinax (Nov. 10, 2009 @ 12:19p) |

thats usually the way for females to offset rent payment

SUCKISSTAPLES (Nov. 10, 2009 @ 12:20p) |

you don't know any gay men, or gay for pay?

crap happens all the time. it'd be farked up if OP was trying to gain a tax ... (more)

Nonaii (Nov. 10, 2009 @ 12:40p) |

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.
Thanks for visiting FatWallet.com. Join for free to remove this ad.

The IRS leaves it to you to prorate all the deductions (however it must be plausible and defensible). The examples they give in the website are:

Prorating by room rented versus number of rooms in the house. You rent out one bedroom out of the 4 in the house (i.e. 2 bedrooms, kitchen and living room) so you can deduct 25% of the expenses. The other method they suggest is by square footage i.e. you rented out a 300 sf room out of your total 1200 sf house so again you deduct 25% of the expenses.

However they give you a bit more leeway with things like the water bill since two people living in a house would double the water bill. I'm not sure how the IRS would react if you just went with 50% of all expenses (assuming the roommate has equal access to kitchen and living room) although it seems pretty defensible to me. Anyone else have experience with this?

With the mortgage interest, it is a wash.

Let's say you pay $1000 interest. Without the rental portion, you can deduct $1000 as primary residence interest.

Now you conclude that you rent out 40% of the house. Only 60% ($600) can be deducted as primary residence interest. The remaining $400 can be subtracted from the rental income.


Depreciation is where it gets interesting. You have to take it. And yes, that will bite you when you sell the house. But since you only rent out 40% for a few years, it won't be a big damage. You save taxes now and possibly pay more at the time of the sale. Whether this matters depends on the value and expected gain. If you live in fly-over country and your house value soars from $150k to $400k, then after the cost of the sale, you still are under the $250k tax free limit. But if you are talking about a $2mm property, where the deduction could amount to $100k or more, and possibly the gain is over $250k.. then.. yes, it will make a difference. But then again, you save today because of the depreciation.

Repairs: yes. If they are in the 40% that you're renting. You could get creative and rent room #1 first, do all necessary repairs as demanded by the tenant, afterwards rent room #2, rinse and repeat. Note that repair is not equal to improvement.

Yes, if your tenant does not pay for (some) utilities, you can deduct 50% (or whatever you feel like).

You definitely can deduct more than your rent. That's the great point of real estate. You charge $400 rent and have depreciation of $500. As long as your AGI is under $100k, you have a very generous limit how much of a loss you can incur. I think the limit is $25,000 per year. From $100k to $150k it gets phased out unless you are a real estate professional (difficult to qualify for).

-Peter

explanation how depreciation works at the resale.

You buy your primary residence for 150k. Spend $30k on upgrades during the next 10 years. (Keep documents).
After 10 years you sell for 250k. The cost basis is $150k + $30k = $180k.
After the cost of the sale (realtor commission etc) you collect net $235k.
Profit: $235k - $180k = $55k - well under the $250k tax free limit.

Now the same story with 5 years of renting 40% of the property.

Purchase: $150k.
After 5 years you start renting it. The property is now worth $200k, of which $50k are land and $150k the structure.
$150k depreciated over 27.5 years = $5,455 per year. Of that 40% = $2182 for you.
5 years of depreciation = $8728.

Then you sell. Cost basis: $150k + $30k (improvements) - $8728k (depreciation) = $171k.

Profit: $235k - $171k = $64k - still tax free.

If all numbers are 10 times as big, you look at 640k versus 550k profit and thus more taxes due.


P.S.: It looks like this would be a good scheme to artificially inflate the profit, to just stay under the $250k limit. That way you save income tax during the time of renting and just stay under the $250k.

in many situations, instead of collecting rent from a roomate, you might want to just have them pay certain expenses such as utilities, groceries etc (in an amount that equals what you charge for "rent")

That way there is nothing to report and it makes things a heck of a lot simpler....

KnickFanRA said:
I know I need to report the rental income...


Only if you want to pay taxes on it.

SUCKISSTAPLES said: in many situations, instead of collecting rent from a roomate, you might want to just have them pay certain expenses such as utilities, groceries etc (in an amount that equals what you charge for "rent")

That way there is nothing to report and it makes things a heck of a lot simpler....


That would be a taxable benefit, though it may be harder for the IRS to track. There was an example on the IRS website regarding that issue but I can't seem to find it at the moment, I will research more after I get home from work.

Thanks guys, this is really helpful so far. I'm going to think this through and see if I have any further questions. In the meantime, any additional insights?

SUCKISSTAPLES said: in many situations, instead of collecting rent from a roomate, you might want to just have them pay certain expenses such as utilities, groceries etc (in an amount that equals what you charge for "rent")

That way there is nothing to report and it makes things a heck of a lot simpler....


Is this really a legitimate way to offset "taxable income"?

are you sleeping with the roommate?

KnickFanRA said: SUCKISSTAPLES said: in many situations, instead of collecting rent from a roomate, you might want to just have them pay certain expenses such as utilities, groceries etc (in an amount that equals what you charge for "rent")

That way there is nothing to report and it makes things a heck of a lot simpler....
Is this really a legitimate way to offset "taxable income"?
Food and utilities is not taxable income.

Nope. No plans to either. Not my type of dude.

I'm sleeping with my roommate. She is currently paying me rent and I really want to keep my tax liability as low as possible. Can anyone confirm that it would be better for her to pay bills instead of rent? She does groceries but could conceivably do Utilities, HOA, Cable, etc instead of writing me a rent check.

How could IRS consider this a taxable benefit? Couldn't I just claim that I don't use cable, don't use any electricity, don't go to the grocery store, etc. How would they know what HOA dues are, or that there are HOA dues at all? Not looking to do anything illegal, just saying.

If this would be advantageous, do I keep the bills in my name and just draw from her account or should they be transferred into her name? I suppose this could even be stretched to allow roommate to buy clothes, pay cell phone, insurance, etc.

At some point do such complex financial intertwinings result in forced common law marriage in Texas? If so, I'd gladly pay the taxes instead!

Great discussion!

FROM THE IRS

Problem is, I'm not smart enough to determine if this is better/worse than having roommate pay bills instead of rent? Anyone care to explain?

Rayout said: SUCKISSTAPLES said: in many situations, instead of collecting rent from a roomate, you might want to just have them pay certain expenses such as utilities, groceries etc (in an amount that equals what you charge for "rent")

That way there is nothing to report and it makes things a heck of a lot simpler....


That would be a taxable benefit, though it may be harder for the IRS to track. There was an example on the IRS website regarding that issue but I can't seem to find it at the moment, I will research more after I get home from work.

Please point out how paying my friend's electric bill is taxable? What if I pay my parents electric bill? Is that taxable? FYI you are allowed to gift people certain amounts of money tax-free, so just say it is a gift that you are paying their bills.
Seriously folks this is hard to trak and SIS's example is perfect on how to get around the rules. I have lived with several friends who owned homes and some of them were paranoid enough to where I just paid them in cash or wrote a check out to Cash. If you are worried just have your roommate pay you in cash and then there is no record. If audited you can always say that they let you let your friend live there for free and to return your kindness they paid for the utilities and food.

nothingevertodo said: I'm sleeping with my roommate.
Congratulations on getting action with your roommate. However, this does not affect rental income as far as the IRS is concerned.

nothingevertodo said: At some point do such complex financial intertwinings result in forced common law marriage in Texas? If so, I'd gladly pay the taxes instead!
The answer is likely no. Please see the rules for common law marriage in Texas: http://en.wikipedia.org/wiki/Common-law_marriage_in_the_United_S...

Problem with cash is that it screws with expense tracking via credit/debit cards. If you just go an deposit the cash, it would be a red flag in the event of an audit. Correct?

nothingevertodo said: Problem with cash is that it screws with expense tracking via credit/debit cards. If you just go an deposit the cash, it would be a red flag in the event of an audit. Correct?
When I rented a room I just paid between 400-500 dollars per month. These kinds of cash deposits (below $1000) do not routinely trigger any banking reports. You can easily explain this as selling your old stuff on craigslist. Now if you are renting out 4-5 rooms and raking in 2000/month it will be easier to track.

biomedeng said: Rayout said: SUCKISSTAPLES said: in many situations, instead of collecting rent from a roomate, you might want to just have them pay certain expenses such as utilities, groceries etc (in an amount that equals what you charge for "rent")

That way there is nothing to report and it makes things a heck of a lot simpler....


That would be a taxable benefit, though it may be harder for the IRS to track. There was an example on the IRS website regarding that issue but I can't seem to find it at the moment, I will research more after I get home from work.

Please point out how paying my friend's electric bill is taxable? What if I pay my parents electric bill? Is that taxable? FYI you are allowed to gift people certain amounts of money tax-free, so just say it is a gift that you are paying their bills.
Seriously folks this is hard to trak and SIS's example is perfect on how to get around the rules. I have lived with several friends who owned homes and some of them were paranoid enough to where I just paid them in cash or wrote a check out to Cash. If you are worried just have your roommate pay you in cash and then there is no record. If audited you can always say that they let you let your friend live there for free and to return your kindness they paid for the utilities and food.
If staying at your place is contingent upon payment of certain bills, then the person is actually not staying at your house for free. Even if you argue that they are staying at the house for free the reciprocal relationship is clear. The value you receive in exchange for provision of shelter is taxable income to the IRS whether it comes in the form of cash, check, electricity, groceries, or anything else. It may be harder for the IRS to discover such payments, but that does not mean they are any less taxable.

biomedeng said: These kinds of cash deposits (below $1000) do not routinely trigger any banking reports. You can easily explain this as selling your old stuff on craigslist.Also taxable income. No banking reports will be triggered by small deposits on an infrequent basis but if the IRS audits you they will assume these deposits are income unless you can prove otherwise, which is of course impossible to do given that they are in fact income. If this happens you'll be subject to interest and penalties. Now, the chances of the IRS auditing you are relatively slim so you may very well get away with the scheme you have proposed with no consequences, but that does not mean it is lawful.

mttatkns said: biomedeng said: These kinds of cash deposits (below $1000) do not routinely trigger any banking reports. You can easily explain this as selling your old stuff on craigslist.Also taxable income. No banking reports will be triggered by small deposits on an infrequent basis but if the IRS audits you they will assume these deposits are income unless you can prove otherwise, which is of course impossible to do given that they are in fact income. If this happens you'll be subject to interest and penalties. Now, the chances of the IRS auditing you are relatively slim so you may very well get away with the scheme you have proposed with no consequences, but that does not mean it is lawful.
FYI, when I sell my old crap on craigslist I do not owe any taxes because I am selling it for less than I paid.
You could also take the cash and spend it at the grocery store if you are super paranoid.

mttatkns said: biomedeng said: These kinds of cash deposits (below $1000) do not routinely trigger any banking reports. You can easily explain this as selling your old stuff on craigslist.Also taxable income...

Explain to me how something I buy for $200 new, and sell for $50 used on Craigslist is taxable income?

mttatkns said: If staying at your place is contingent upon payment of certain bills, then the person is actually not staying at your house for free. Even if you argue that they are staying at the house for free the reciprocal relationship is clear. The value you receive in exchange for provision of shelter is taxable income to the IRS whether it comes in the form of cash, check, electricity, groceries, or anything else. It may be harder for the IRS to discover such payments, but that does not mean they are any less taxable.
I know of many people whoose parent(s) or adult children live with them and in exchange pay for bills or food. I am guessing none of them declare this as income. And what about non-married people cohabitating where only one person owns the house and the other person gives them money every month to cover the costs?
The real problem with this situation is it is hard to figure out what the taxable income is. Did you see this IRS document where you calculate the square feet of the other person's room? What about when you are sleeping with your roommate in the same room? And likely some people would be able to take a write-off since the rent paid is less than the expenses of maintenance and mortgage interest. So if the IRS ended up auditing these people they would likely get a refund.

Any tax accountants here know the technically correct way to account for this?

biomedeng said: mttatkns said: biomedeng said: These kinds of cash deposits (below $1000) do not routinely trigger any banking reports. You can easily explain this as selling your old stuff on craigslist.Also taxable income. No banking reports will be triggered by small deposits on an infrequent basis but if the IRS audits you they will assume these deposits are income unless you can prove otherwise, which is of course impossible to do given that they are in fact income. If this happens you'll be subject to interest and penalties. Now, the chances of the IRS auditing you are relatively slim so you may very well get away with the scheme you have proposed with no consequences, but that does not mean it is lawful.
FYI, when I sell my old crap on craigslist I do not owe any taxes because I am selling it for less than I paid.
You could also take the cash and spend it at the grocery store if you are super paranoid.
If you're consistently bringing in $400-500 a month by selling things online it's unlikely that you're selling items that you purchased for personal use and wore out and more likely that you are operating a small business buying things in bulk and selling them at a slight markup but still well below retail (as many do on eBay). Consequently, this activity should be reported on a Schedule C. The revenues generated by selling items are taxable income and expenses incurred to purchase items are deductions. Thus, if you are indeed selling items at a loss you would not owe tax from the transaction. However, if the items never actually existed you could not deduct a purchase price and you consequently would owe tax from the transaction.

If you receive the money as "rent", then you need to include it as income, and you must depreciate. If you receive some other consideration, such as a "gift" of $5,000 per year, than that's tax-free. If some of your bills are being paid by someone else, that should be considered a gift as well. It's all semantics...

mttatkns said: biomedeng said: These kinds of cash deposits (below $1000) do not routinely trigger any banking reports. You can easily explain this as selling your old stuff on craigslist.Also taxable income. No banking reports will be triggered by small deposits on an infrequent basis but if the IRS audits you they will assume these deposits are income unless you can prove otherwise, which is of course impossible to do given that they are in fact income...

My Aunt Edith cannot give me a gift of $400 on a semi-regular basis?

mttatkns said: biomedeng said: Please point out how paying my friend's electric bill is taxable? What if I pay my parents electric bill? Is that taxable? FYI you are allowed to gift people certain amounts of money tax-free, so just say it is a gift that you are paying their bills.
Seriously folks this is hard to trak and SIS's example is perfect on how to get around the rules. I have lived with several friends who owned homes and some of them were paranoid enough to where I just paid them in cash or wrote a check out to Cash. If you are worried just have your roommate pay you in cash and then there is no record. If audited you can always say that they let you let your friend live there for free and to return your kindness they paid for the utilities and food.
If staying at your place is contingent upon payment of certain bills, then the person is actually not staying at your house for free. Even if you argue that they are staying at the house for free the reciprocal relationship is clear. The value you receive in exchange for provision of shelter is taxable income to the IRS whether it comes in the form of cash, check, electricity, groceries, or anything else. It may be harder for the IRS to discover such payments, but that does not mean they are any less taxable.


Yeah, that's the way the code is written. There are a couple of cases on point, too.. any exchange of anything for value is potentially taxable. A gift is tax-free (up to $13k per year, this year). But if the exchange is a barter of services (a real right of habitation) for goods, then it's imputed taxable income to the performer. Strictly speaking, if you're a mechanic and you fix your doctor's car in exchange for a physical, even though no money has entered the transaction or goods exchanged hands, it's still imputes taxable income to both parties. You have no basis in your own labor, so if you expend labor for anything at all (other than that warm fuzzy feeling you get when you volunteer or give something away), you've imputed taxable income.

KnickFanRA said: Any tax accountants here know the technically correct way to account for this?

Well, I'm not a tax accountant but I work in the field. You've gotten some good advice in this thread, anything more specific is going to need more details, and you should probably call a CPA or tax lawyer for a quick consult.

This is an interesting thread. One other thing I'm not sure about, but in my state, there's a section for rent deduction that you can put down on your state income tax. I suppose that's there so they can figure out if the landlord is reporting the rent of the tenant. Your state might not have that though.

What's interesting is what happens if you convert it back to a primary residence and then sell it later? Does recapture of depreciation take place?

Porqin said: mttatkns said: biomedeng said: These kinds of cash deposits (below $1000) do not routinely trigger any banking reports. You can easily explain this as selling your old stuff on craigslist.Also taxable income. No banking reports will be triggered by small deposits on an infrequent basis but if the IRS audits you they will assume these deposits are income unless you can prove otherwise, which is of course impossible to do given that they are in fact income...

My Aunt Edith cannot give me a gift of $400 on a semi-regular basis?
If your Aunt Edith gifts you $400 on a semi-regular basis solely because she cares for your well-being, she can do so with no tax liability as long as the sum total of said semi-regular payments does not exceed $13k annually (in which case she may owe gift tax). If your Aunt Edith happens to live with you, does not otherwise pay monetary rent, and happens to pay you approximately $400 around the first of every month, that's not a gift but payment for services (her housing) which is taxable income.

Agree thats the correct way to report such a regular payment for shared housing, but does not jive with reality, where the % of people who actually report $$ from family members, girlfriends, boyfriends , friends etc who share a home as "rental income" on their tax return is probably somewhere in the low single digits.

SUCKISSTAPLES said: Agree thats the correct way to report such a regular payment for shared housing, but does not jive with reality, where the % of people who actually report $$ from family members, girlfriends, boyfriends , friends etc who share a home as "rental income" on their tax return is probably somewhere in the low single digits.

I was going to say, most people I know who rent out a room in their home simply don't report the income. Realistically you could probably just not declare the income and get away with it, unless your taxes will be scrutinized for one reason or another.

ppatin said: SUCKISSTAPLES said: Agree thats the correct way to report such a regular payment for shared housing, but does not jive with reality, where the % of people who actually report $$ from family members, girlfriends, boyfriends , friends etc who share a home as "rental income" on their tax return is probably somewhere in the low single digits.

I was going to say, most people I know who rent out a room in their home simply don't report the income. Realistically you could probably just not declare the income and get away with it, unless your taxes will be scrutinized for one reason or another.
Agreed, this behavior will not be detected unless you are chosen for an IRS audit for some reason. However, it is important that people realize that this is not the proper legal way to account for such income so that they can make the most informed decision and not have any unexpected surprises down the road. From prior conversation it was implied that in-kind exchanges were a legitimate way to eliminate tax liability, etc.

in an audit, inkind contributions would not appear anywhere, no money is ever entering your accounts

I honestly cant even imagine an auditor saying "so your gf bought the groceries huh? And did you eat the steak while she is vegan? Ok we are attributing $10 per meal to you as rental income"

"now ,who uses these hair care products...hmm i see two brands ... your gf uses pantene but she buys you Kiehls thats a very pricey product, im going to have to attribute another $50 per month rental income to you"

"gf buys your dog supplies, huh? Sorry these are inkind cobtributions and this $150 per month is also rental income sir"

"well mr fw looks like you havent been reporting $450 per month rent"

SUCKISSTAPLES said: in an audit, inkind contributions would not appear anywhere, no money is ever entering your accounts

I honestly cant even imagine an auditor saying "so your gf bought the groceries huh? And did you eat the steak while she is vegan? Ok we are attributing $10 per meal to you as rental income"

"now ,who uses these hair care products...hmm i see two brands ... your gf uses pantene but she buys you Kiehls thats a very pricey product, im going to have to attribute another $50 per month rental income to you"

"gf buys your dog supplies, huh? Sorry these are inkind cobtributions and this $150 per month is also rental income sir"

"well mr fw looks like you havent been reporting $450 per month rent"
Obviously smaller amounts are harder to detect, just as a cashier skimming 1% of daily sales is much less likely to be caught than one pocketing a larger percentage of the till. While groceries may be difficult to prove, a larger amount and breadth of in-kind payments would be more noticeable - e.g. the fact that you own a home yet have not paid one electric/gas/water/sewer/trash/cable/phone/internet bill over the course of the year.

Nonaii said: are you sleeping with the roommate?Interesting, have you found that to be a way to offset taxable income?

henry33 said: One other thing I'm not sure about, but in my state, there's a section for rent deduction that you can put down on your state income tax. I suppose that's there so they can figure out if the landlord is reporting the rent of the tenantYes, that can be tricky.

xoneinax said: Nonaii said: are you sleeping with the roommate?Have you found that to be a way to offset taxable income?thats usually the way for females to offset rent payment

SUCKISSTAPLES said: xoneinax said: Nonaii said: are you sleeping with the roommate?Have you found that to be a way to offset taxable income?thats usually the way for females to offset rent payment

you don't know any gay men, or gay for pay?

crap happens all the time. it'd be farked up if OP was trying to gain a tax advantage over someone OP was sleeping with, though, you know I mean? or maybe you don't.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

TRUSTe online privacy certification

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2014