Author Topic: Owner Occupant Rental Questions  (Read 1672 times)

mpbaker22

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Owner Occupant Rental Questions
« on: April 22, 2014, 07:55:05 AM »
I bought a house last week as an owner occupant/rental/boarder situation.  It's a single family home with three bedrooms, and I plan to rent 2 of the bedrooms out to some friends.  I have a number of questions about this.

If I do something like $200-$300/month rent, do I report that as income to the IRS?  Can I then use rental expenses to offset that income?

How sort of a contract should I have?  I generally trust the people I'll have around.  However, we all know that disputes will happen if/when the unexpected happens.  I'm fine with just receiving cash without a contract, but what happens when a fire burns the place down and we dispute who gets what damages ...

Philociraptor

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Re: Owner Occupant Rental Questions
« Reply #1 on: June 17, 2014, 12:41:45 PM »
Would like to know an answer to this from a person who's better at taxes than me. 

With my roommates we have a "gentleman's agreement", nothing super official, just a few rules to live by (do your dishes promptly, quiet hours, guest policy).  If something breaks the person who broke it fixes/replaces it.  Simple enough if you trust the people you live with.  They're friends from high school.

Johnny Aloha

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Re: Owner Occupant Rental Questions
« Reply #2 on: June 17, 2014, 01:45:32 PM »
I bought a house last week as an owner occupant/rental/boarder situation.  It's a single family home with three bedrooms, and I plan to rent 2 of the bedrooms out to some friends.  I have a number of questions about this.

If I do something like $200-$300/month rent, do I report that as income to the IRS?  Can I then use rental expenses to offset that income?

How sort of a contract should I have?  I generally trust the people I'll have around.  However, we all know that disputes will happen if/when the unexpected happens.  I'm fine with just receiving cash without a contract, but what happens when a fire burns the place down and we dispute who gets what damages ...

Regarding the contract/lease -  depends on your area.  In my area, verbal leases are still considered legal and valid, although if there's a dispute it can get complicated.  Imagine what could happen if you have different understandings of quiet hours, utility share, whatever.  Also, what if you want them out but they won't leave?  Probably best to have a lease, although I use a verbal lease on an attached studio apartment I rent to a friend.  No issues over the past 1.5 years.  The key is to make sure you have open, regular communicaiton.

Regarding taxes - I'm not a CPA, but my understanding is that declaring income depends on market rates.  If you are charging under market rent, you might not need to report it because it would show as a loss on tax return after expenses and depreciation.  This could possibly offset earned income, which is not in the IRS's best interest.   There was a similar question on the forums a while back, but couldn't find the thread.

ingrownstudentloans

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Re: Owner Occupant Rental Questions
« Reply #3 on: June 17, 2014, 02:24:27 PM »
no - income is income, regardless of the "market value" of the rental.  Consult an accountant or a tax attorney on this. 

I report all of the income on my owner-occupied 2 unit because i can depreciate 1/2 of 1/27th of the purchase price and because I pay the utilities, I can deduct 1/2 of the utilities, I also deduct other things as rental expenses such as 1/2 of the property taxes, 1/2 of repair costs to common areas...etc...if i did not report the income, not only would I be committing a crime, I would not get the tax benefits of owning a rental property. 

Before you take advice from this board (which is usually really good advice) consult a professional, pay them a little for their guidance, and get the confidence that you need to make sure that you are legally and financially making the best choices (not to mention the guarantee that comes with their malpractice insurance).