Author Topic: Financial benefit of a roommate  (Read 1145 times)

salt cured

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Financial benefit of a roommate
« on: April 23, 2019, 07:08:55 PM »
Currently, I rent my house for a few weekends in May, taking home $5k tax-free. My question is, what's the financial benefit of moving to a full-time roommate?

I have a 2000sqft home and could rent a 500sqft room for $900/month. I'd want to continue doing the May weekend rentals and would give my roommate free rent in May provided s/he vacate for those weekends. Ignoring the value of living alone vs with a roommate, I'm exchanging $5k tax-free for $5k + $0.9k*11 = $14.9k gross rental income.

This income would be taxed at a ~30% marginal rate but needs to be adjusted for deductions and whatnot. My best guess at deductions are below (the private room represents 25% of the house, the shared space represents 70%). So I'm guessing I can deduct 95% of most expenses?

95% of $7k mortgage interest = $6.6k
95% of $11k property tax = $10.4k
95% of $9k annual depreciation ($257k structure value / 27.5 years) = $8.5k
95% of $5k utilities = $4k
100% of $1k direct expenses = $1k

Assuming I've done this correctly, I get $30.5k of business deductions, and I have a paper loss. My understanding is that I could apply that loss to my w2 income for a savings of another $15.6k*.3 = $4.6k. But, I can no longer itemize on my personal taxes and my liability increases $1.5k there.

So without a roommate, I earn $5k for a few weekends of renting. With a roommate, I earn $14.9k + $4.6k - $1.5k = $18k. Plus I get someone to call 911 if I choke on a pretzel.

Is this right? Can I really take $30k of business deductions and treat them as I've done here, or are my assumptions off somewhere?

Edit: I'm US-based.
Edit2: Fixed some numbers (I think I fixed them, anyway).
« Last Edit: April 23, 2019, 07:16:46 PM by salt cured »

waltworks

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Re: Financial benefit of a roommate
« Reply #1 on: April 23, 2019, 07:36:52 PM »
You can deduct 25% for those items (that is a HUGE bedroom!) - the portion of the house that is being rented. The shared space is not considered part of the rental in this case (ie, anything you have personal access/use of).

You *might* be able to deduct more if, say, the house only has 3 bedrooms and hence 1/3 of the home is being rented. I'd talk to a CPA on that question though.

I would say it's still worth doing if you like living with other people, but the tax situation is not the main driver.

-W


salt cured

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Re: Financial benefit of a roommate
« Reply #2 on: April 23, 2019, 08:32:34 PM »
You can deduct 25% for those items (that is a HUGE bedroom!) - the portion of the house that is being rented. The shared space is not considered part of the rental in this case (ie, anything you have personal access/use of).

You *might* be able to deduct more if, say, the house only has 3 bedrooms and hence 1/3 of the home is being rented. I'd talk to a CPA on that question though.

I would say it's still worth doing if you like living with other people, but the tax situation is not the main driver.

-W

Ahh, thanks. Didn't realize that. Yes, the room is pretty big. It's a finished attic space that is zoned as a bedroom. I'll redo my numbers and run them by the accountant.

ixtap

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Re: Financial benefit of a roommate
« Reply #3 on: April 23, 2019, 08:36:06 PM »
Why would you require the roommate to leave in May if you already have more income from having them for the full year?

Papa bear

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Re: Financial benefit of a roommate
« Reply #4 on: April 23, 2019, 08:47:55 PM »
Some of that income from the roommate may be considered shared expenses which would be non taxable.  Utilities, internet and television content, trash collection, etc could all potentially fall under that. Check with your accountant. 


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Car Jack

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Re: Financial benefit of a roommate
« Reply #5 on: April 24, 2019, 07:09:02 AM »
What do you mean you take in $5k "tax free"?  Do you mean that you've gotten away with tax evasion or did the renter send a check to the IRS on your behalf for income taxes due?


salt cured

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Re: Financial benefit of a roommate
« Reply #6 on: April 24, 2019, 07:26:29 AM »
What do you mean you take in $5k "tax free"?  Do you mean that you've gotten away with tax evasion or did the renter send a check to the IRS on your behalf for income taxes due?

Rental income is tax free (federally) if you rent your place for fewer than 14 days. I paid a small amount of local taxes.

Papa bear

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Re: Financial benefit of a roommate
« Reply #7 on: April 24, 2019, 07:57:48 AM »
What do you mean you take in $5k "tax free"?  Do you mean that you've gotten away with tax evasion or did the renter send a check to the IRS on your behalf for income taxes due?

Rental income is tax free (federally) if you rent your place for fewer than 14 days. I paid a small amount of local taxes.

In tax class in college, the professor called it the Augusta masters tournament loophole.


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salt cured

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Re: Financial benefit of a roommate
« Reply #8 on: April 24, 2019, 08:39:01 AM »
I looked at the numbers again this morning using the correct deduction amount, and I find that a roommate would net me between $5k and $6k a year, which I don't think is worth sharing my home for unfortunately. I'm going to shelve the idea for now. Thanks all.

marty998

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Re: Financial benefit of a roommate
« Reply #9 on: April 25, 2019, 04:23:56 PM »
If you rent out a room, would you home be liable for a proportionate amount of capital gains tax when you eventually sell?

Many AirBnB wannabe hotel barons are finding that out the hard way here.

SwordGuy

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Re: Financial benefit of a roommate
« Reply #10 on: April 25, 2019, 05:13:52 PM »
I suggest www.http://theliveinlandlord.com/.   She's really savvy.

She's also a poster on this forum but I forget her handle.   Damn, but her posts are so articulate, on point, and funny.



pbkmaine

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Re: Financial benefit of a roommate
« Reply #11 on: April 25, 2019, 06:28:33 PM »
I suggest www.http://theliveinlandlord.com/.   She's really savvy.

She's also a poster on this forum but I forget her handle.   Damn, but her posts are so articulate, on point, and funny.

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walkwalkwalk

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Re: Financial benefit of a roommate
« Reply #12 on: April 26, 2019, 08:00:25 AM »
I looked at the numbers again this morning using the correct deduction amount, and I find that a roommate would net me between $5k and $6k a year, which I don't think is worth sharing my home for unfortunately. I'm going to shelve the idea for now. Thanks all.
I think you may be mixing up income for tax purposes and what you would actually get financially from it. (I could be wrong) Can you tell us how you came to the 5k to 6k?

salt cured

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Re: Financial benefit of a roommate
« Reply #13 on: April 26, 2019, 03:57:13 PM »
I looked at the numbers again this morning using the correct deduction amount, and I find that a roommate would net me between $5k and $6k a year, which I don't think is worth sharing my home for unfortunately. I'm going to shelve the idea for now. Thanks all.
I think you may be mixing up income for tax purposes and what you would actually get financially from it. (I could be wrong) Can you tell us how you came to the 5k to 6k?

I meant that I'd net another $5k to $6k in addition to the $5k for the May rentals. I just took the total estimated gross, subtracted 25% of the majority of the expenses listed above, and then subjected that to 30% tax.

walkwalkwalk

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Re: Financial benefit of a roommate
« Reply #14 on: April 27, 2019, 07:03:08 AM »
I looked at the numbers again this morning using the correct deduction amount, and I find that a roommate would net me between $5k and $6k a year, which I don't think is worth sharing my home for unfortunately. I'm going to shelve the idea for now. Thanks all.
I think you may be mixing up income for tax purposes and what you would actually get financially from it. (I could be wrong) Can you tell us how you came to the 5k to 6k?

I meant that I'd net another $5k to $6k in addition to the $5k for the May rentals. I just took the total estimated gross, subtracted 25% of the majority of the expenses listed above, and then subjected that to 30% tax.
To come to an accurate number, you have to determine what you'd pay in tax on it, because the taxable amount isn't what you're netting financially, since your expenses don't change by the same amount you are deducting. So subtract tax from gross, plus any true additional expenses you wouldn't pay if they weren't there, and then you get your number.

salt cured

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Re: Financial benefit of a roommate
« Reply #15 on: April 27, 2019, 07:39:35 AM »
I looked at the numbers again this morning using the correct deduction amount, and I find that a roommate would net me between $5k and $6k a year, which I don't think is worth sharing my home for unfortunately. I'm going to shelve the idea for now. Thanks all.
I think you may be mixing up income for tax purposes and what you would actually get financially from it. (I could be wrong) Can you tell us how you came to the 5k to 6k?

I meant that I'd net another $5k to $6k in addition to the $5k for the May rentals. I just took the total estimated gross, subtracted 25% of the majority of the expenses listed above, and then subjected that to 30% tax.
To come to an accurate number, you have to determine what you'd pay in tax on it, because the taxable amount isn't what you're netting financially, since your expenses don't change by the same amount you are deducting. So subtract tax from gross, plus any true additional expenses you wouldn't pay if they weren't there, and then you get your number.

Good point. I had subtracted $1000 of additional expenses, but it was a total guess.

BicycleB

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Re: Financial benefit of a roommate
« Reply #16 on: April 27, 2019, 04:14:15 PM »
You can deduct 25% for those items (that is a HUGE bedroom!) - the portion of the house that is being rented. The shared space is not considered part of the rental in this case (ie, anything you have personal access/use of).

You *might* be able to deduct more if, say, the house only has 3 bedrooms and hence 1/3 of the home is being rented. I'd talk to a CPA on that question though.

I would say it's still worth doing if you like living with other people, but the tax situation is not the main driver.

-W

If the landlord and roommate both use the common areas (kitchen, laundry room, bathroom in a house that only has a shared bathroom), aren't those areas being rented too? The landlord and roommate both use them, so wouldn't it be reasonable to split the square footage of the common areas?

waltworks

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Re: Financial benefit of a roommate
« Reply #17 on: April 27, 2019, 08:13:09 PM »
If the landlord and roommate both use the common areas (kitchen, laundry room, bathroom in a house that only has a shared bathroom), aren't those areas being rented too? The landlord and roommate both use them, so wouldn't it be reasonable to split the square footage of the common areas?

It might indeed be "reasonable" but it's not how the tax law works (again, I am not a CPA, so it's possible that I'm wrong).

-W

BicycleB

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Re: Financial benefit of a roommate
« Reply #18 on: April 28, 2019, 06:27:04 AM »
If the landlord and roommate both use the common areas (kitchen, laundry room, bathroom in a house that only has a shared bathroom), aren't those areas being rented too? The landlord and roommate both use them, so wouldn't it be reasonable to split the square footage of the common areas?

It might indeed be "reasonable" but it's not how the tax law works (again, I am not a CPA, so it's possible that I'm wrong).

-W

@waltworks, I might be misunderstanding how the tax law works too. The word reasonable is a quote from IRS Publication 527's discussion of "How to Divide Expenses":

"If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. You can use any reasonable method for dividing the expense."

I own a 4 bedroom house that I typically share with 3 roommates. My lease states that each renter has use of their bedroom "and the common areas", though it says they can't use the common areas for storage. Since the common areas include a rental use, I include them in the rented area. Only my own bedroom is off limits to the renters. So a 75%/25% split seems to fit their definition of reasonable. But I've never been audited, so maybe they'll disagree.

The publication has 2 examples with smaller percentages, but they both envision that the property is separated between "their" area, so to speak, and "my" area. Clearly I can't deduct "my" area as "their" expense (their and my are personal terms, not the IRS's). I haven't been able to find a publication that clearly envisions shared space, ie a roommate situation. So I wrote my lease to clarify that common areas were included in the rent. I don't take that to mean that common areas are 100% deductible, only that common areas are deductible in proportion to number of roommates (for me 75%, but in OP's shoes, I'd divide 50/50 in the event of getting a roommate).

https://www.irs.gov/publications/p527#en_US_2018_publink1000219159

Is there a place where the law says this isn't OK? I have found numerous third party articles that seem to have taken the IRS examples to mean common areas are excluded, but I can't see where the examples include them in the first place.

I understand you're not a CPA, but you stated "it's not how the tax law works", you probably have a good reason for doing so. Could you let me know what led you to say it?

Thanks!!
« Last Edit: April 28, 2019, 06:45:04 AM by BicycleB »

waltworks

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Re: Financial benefit of a roommate
« Reply #19 on: April 28, 2019, 08:51:33 AM »
I have no specific info on the IRS requirements, just that I was advised to do it based on square footage division (no common areas) by a friend (this was 10 years ago) who is a CPA.

My memory of the conversation is not crystal clear, but he said something along the lines of "you can get away with almost anything until they audit you, but the square footage (not deducting common area) is bulletproof if they do."

I think the issue is that reasonable people can disagree about what constitutes shared space and a lot of people end up tempted to really push it to squeeze every penny of deduction. Then when audited there's room for the IRS to interpret the situation differently than you did.

Again, a real CPA could answer this better.

-W

BicycleB

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Re: Financial benefit of a roommate
« Reply #20 on: April 28, 2019, 09:35:09 AM »
Ok, thanks. That makes sense.

SunnyDays

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Re: Financial benefit of a roommate
« Reply #21 on: April 28, 2019, 07:45:00 PM »
I'm Canadian, but this is how my roommate rental income worked this past year:
-450.00/month rent for one of three bedrooms, plus shared everything else.  I had assumed I could claim 20% rental space (1 out of 5 rooms) but my accountant said 33 %, given that the roommate used the other rooms as well.
-I could claim 33% of all housing-related expenses that the roommate also benefited from, such as property taxes, house insurance, utilities, cable/internet, furnace cleaning, any house maintenance, such as painting and a new window and yard maintenance when hired out.  My mortgage is paid off, so couldn't claim that.
-As the rent is taxed at my marginal rate, it wasn't really worth it to me financially, especially when I factored in the irritation factor of having someone else around all the time plus the extra housework they created for me.  So, personally, I won't do it again once they move on, but it depends a lot on your tolerance for others and how much you financially benefit.

Villanelle

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Re: Financial benefit of a roommate
« Reply #22 on: April 28, 2019, 07:51:19 PM »
What tenant is going to vacate for a month for free rent???  "Free rent" is pretty meaningless when you have to find another place to stay, and you probably need to move at least some of your stuff out of your room. What a pain!  I suspect you may be able to find someone willing to couch surf with friends for a month, but I doubt it would be a high-quality tenant.  They can have the same situation in another place, without the headache of having to move out. 

So to me, this doesn't sound especially viable unless there is something in it for them, assuming you charge FMV for the other 11 months.  (Again, someone willing to couch surf or live in a car or otherwise house hack for a month probably exists, but is going to be harder to find and is less likely to want a regular rent payment in a nice place for the other 11 months.)