Author Topic: Rental reporting and rent money  (Read 1084 times)

dragonwalker

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Rental reporting and rent money
« on: January 22, 2022, 09:49:44 AM »
I live in CA and in May 2021 I bought a 2B2B condo. I live in one room, and I rent the other out every month for $1,000. My work income is modest and now that 2021 is over Iím looking at gathering everything for taxes. The filing of my 2021 taxes will probably be the most different than I have ever done since it involved the purchase of a first-time home, rental of that home, sale of substantial amount of stock resulting in capital gains, and the start of educational expenses for graduate education. Iíve always done my taxes myself but do any of you think itís advisable to use a CPA or accountant this first go around or is it a waste? I know my situation is not truly complex, but it is substantially different than what I have done in the past?

I was also going back and forth about whether I should report the rental income to begin with. From my research I am obligated to do so but some part of me obviously really doesnít want to. I know people say I can take many write offs but for better or worse I think those write offs for me would be more limited. One big reason being a phenomenally low interest rate from work. One thing that concerns me that never hit me before was the fact that my tenant pays me by check but the name on the check appears to have another family memberís name and below it literally has DBA and a business name. The signature on the check is not his own. The memo line of the check indicates itís for so and so month rent. My tenant is a young medical professional which I have independently confirmed, and I donít know his exact connection to this person or DBA listed. I suspect perhaps itís coming from a parentís account and they may be doing it this way for ďtaxĒ purposes. I donít why I didnít question is earlier but does accepting payment in this way affect me at all?

One thing that came to my mind is now Iím heavily leaning toward reported the income in the event that this is coming from a business perhaps not being reported entirely correctly and they face an audit that eventually drags me in. I guess bottom line is the evidence to me suggests that I may be at higher risk of exposure if I donít do everything 100% correctly. Perhaps some of you can shed some light on this and convince me to do the right thing. Thanks.       

Jon Bon

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Re: Rental reporting and rent money
« Reply #1 on: January 22, 2022, 10:17:00 AM »
Google says:

"While the overall individual audit rates are extremely low, the odds increase significantly as your income goes up (especially if you have business income)."

I have business income, and I think if I remember correctly filing a schedule E raises your chances significantly. But its you know .0001% to .001%. So most likely you would be fine no claiming. I rented a room to a buddy years ago I think maybe it was $400 a month that I never claimed? I was only making 60k a year or so, it is not worth it to the IRS to even look at those income levels. Regular W-2 workers cant really cheat on their taxes, versus its much easier for a small business owner to fudge things.

I claim my income as required by law, but with expenses of renting out the house plus deprecation I don't pay much in tax.

YMMV.


bacchi

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Re: Rental reporting and rent money
« Reply #2 on: January 22, 2022, 10:51:23 AM »
As a small business owner, I received a few CP2000 notices in my last years of full-time working. They were stupid -- I reported exactly what the 1099s reported -- but because of other non-verifiable sources of income and deductions, the computer couldn't figure out what was going on. Even a CP notice is a pain-in-the-ass that requires a lot of paperwork.

You're right to be concerned. As Jon Bon mentioned, small business returns have a much higher rate of audit.

Catbert

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Re: Rental reporting and rent money
« Reply #3 on: January 22, 2022, 11:02:41 AM »
While I would never recommend someone else violating tax laws, I probably wouldn't report the room rental income.  Taking the associated write-offs will complicate your taxes as long as you owe the property.  I've had moderately complicated taxes for 40+ years (e.g., rental homes, capital gains and losses, losses from natural disasters, etc).  I've only been "audited" twice.  Both were just letters asking me to document energy saving improvements and solar installation.

As noted above the chances of someone with simple taxes and moderate income are extremely low.  Personally, I'd take the chance and plead stupidity if I were caught.  They aren't going to send you to jail, just ask for back taxes and penalties. 

YttriumNitrate

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Re: Rental reporting and rent money
« Reply #4 on: January 22, 2022, 11:08:39 AM »
As Jon Bon noted, the amount of taxes you pay now will likely be minimal due to depreciation. Adding a rental income to your taxes does increase the difficulty a bit, but it's mainly just gathering more documents. Spending $30 for tax software to guide you through the process is worth it in my opinion (at least for the first year).


It looks like California has a renter's credit (https://www.freetaxusa.com/help/display_faq.jsp?qualify-nonrefundable-renters-credit&faq_id=689) so you definitely don't want to be in a situation where someone is claiming that credit and you're not reporting rental income.

SunnyDays

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Re: Rental reporting and rent money
« Reply #5 on: January 22, 2022, 11:10:23 AM »
I had rented out a room for a year also, and did go through H&R Block to file taxes even though I normally do my own, because I wasn't familiar with all the ins and outs of it.  The filer was able to get my actual profit down to just $150 by using write-offs, some of which I would not have considered. So it didn't impact my taxes owed at all.

In addition, if the tenant is claiming rent in their taxes (and why wouldn't they?) you might be caught cheating by not claiming the income.  This could potentially lead to problems with auditing in future years.

I would be above board with anything tax related.

Sibley

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Re: Rental reporting and rent money
« Reply #6 on: January 22, 2022, 11:45:26 AM »
Not sure why you didn't post in the taxes section, but ok. I'm out of the tax game, but will try to id as much as I can.

First, not reporting the rental income is tax fraud. Let's just call it what it is. If you're ok with committing fraud, that's on you. Any ethical professional is going to drop you like a hot potato and possibly report you to the IRS.

1. you bought a house. You may be able to itemize your deductions, depends on how the math works. Mortgage interest, property taxes, and some things that may have been part of the purchase of the house are deductible on Schedule A. Sounds like you're filing single, the standard deduction is around $12k this year so you have to have enough to get over that hurdle. Probably can honestly - state and local taxes (up to $10k) are deductible.

2. you're renting out a bedroom. I'm not familiar with specific nuances to renting out a single room, but in general, you'll report the rental income on the Sch E. You can deduct all or a portion of home expenses, depends on what it is, and you can deduct expenses directly related to the rental. So, assuming that you're getting a flat $1k every month and the tenant isn't paying a share of utilities separately, then you can deduct a portion of all the utilities. It'll be based on square footage rented vs total square footage, whatever that % is. If there's repairs/maintenance to the property, again, portion can be deducted. UNLESS the cost is 100% related to the rented portion, then that is 100% deductible.

You can also deduct a portion of mortgage interest and property taxes on the Sch. E. This is probably more valuable than on Sch A because it reduces your AGI, but also depending on the math it may preclude you from being able to itemize.

You can also depreciate. I'm not sure if you have to depreciate or if its optional though, and don't feel like googling that. Someone else can chime in. If you depreciate, then you'll just depreciate the rental portion. If you bought the house for $100, and you're renting out 25%, then you'll depreciate just $25. Don't mess this up. When you SELL the house however, you will have to recapture the depreciation that you took - ie, it's income. Even if you stop renting out that bedroom and sell 10 years later. Even though normally primary residences get a gain exclusion, the rental changes things and you'll owe capital gain taxes on the depreciation you took.

2b. You going down this rabbit hole of who pays the rent is just that - a rabbit hole. It doesn't matter. The only way it might matter is if you get a 1099, because that is reported to the IRS. But since it's fraud to not report the income and of course you're not going to commit fraud, that doesn't matter.

3. you went back to school. There's education deductions/credits out there, I've completely forgotten how all that works.

Overall, if I were in your shoes, I'd get someone to do my taxes this year, then next year I'd do them myself. That way you know everything gets done right this year and you'll have a decent guide to follow next year.

bacchi

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Re: Rental reporting and rent money
« Reply #7 on: January 22, 2022, 12:06:06 PM »
You can also depreciate. I'm not sure if you have to depreciate or if its optional though, and don't feel like googling that. Someone else can chime in.

Yes, you have to depreciate.

dragonwalker

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Re: Rental reporting and rent money
« Reply #8 on: January 22, 2022, 11:23:43 PM »
Thanks everyone, interesting there were more people than I thought suggesting I can get away with not reporting. A few points, since I did verify my roommates income I know that he earns well above the amount to be able to claim the rental write off in CA unless ofcourse he has some deductions of his own which bring his AGI below 45K which I'm 99% he doesn't. That's my fear about once I report I have all these other pesky complications like depreciation recapture and I read somewhere now my capital gains exemption for single individual is cut in half unless I go some period of time I think like 3 of 5 years without renting. Just to clarify I do not have a business and I'm fully W2, the point I was making was the check I am being paid from my room mate is from another person with a business and personal name on it so I'm not sure if again that increases my exposure because by extension some business is involved, albeit indirectly.

If I decide to go with a CPA or account I assume then if I don't plan to report I can't event mention I am collecting rent or do I and tell them I don't want to report. I think they are obligated to report...I don't know??
« Last Edit: January 22, 2022, 11:25:50 PM by dragonwalker »

Sibley

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Re: Rental reporting and rent money
« Reply #9 on: January 23, 2022, 07:43:13 PM »
I'm out. You wanna commit fraud, I'm not going to help.

Jon Bon

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Re: Rental reporting and rent money
« Reply #10 on: January 23, 2022, 08:17:37 PM »
Thanks everyone, interesting there were more people than I thought suggesting I can get away with not reporting. A few points, since I did verify my roommates income I know that he earns well above the amount to be able to claim the rental write off in CA unless ofcourse he has some deductions of his own which bring his AGI below 45K which I'm 99% he doesn't. That's my fear about once I report I have all these other pesky complications like depreciation recapture and I read somewhere now my capital gains exemption for single individual is cut in half unless I go some period of time I think like 3 of 5 years without renting. Just to clarify I do not have a business and I'm fully W2, the point I was making was the check I am being paid from my room mate is from another person with a business and personal name on it so I'm not sure if again that increases my exposure because by extension some business is involved, albeit indirectly.

If I decide to go with a CPA or account I assume then if I don't plan to report I can't event mention I am collecting rent or do I and tell them I don't want to report. I think they are obligated to report...I don't know??

I think you need to have a hypothetical conversation with a CPA/Tax expert.

If it was a few thousand I might let it ride, but it sounds like its going to be substantially more than that.

Its honestly not that much of a pain in the ass to file schedule E. Yes it makes your audit risk slightly hire, but your all above board so who cares?

Best of luck.


oneday

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Re: Rental reporting and rent money
« Reply #11 on: January 23, 2022, 10:03:42 PM »
Thanks everyone, interesting there were more people than I thought suggesting I can get away with not reporting. A few points, since I did verify my roommates income I know that he earns well above the amount to be able to claim the rental write off in CA unless ofcourse he has some deductions of his own which bring his AGI below 45K which I'm 99% he doesn't. That's my fear about once I report I have all these other pesky complications like depreciation recapture and I read somewhere now my capital gains exemption for single individual is cut in half unless I go some period of time I think like 3 of 5 years without renting. Just to clarify I do not have a business and I'm fully W2, the point I was making was the check I am being paid from my room mate is from another person with a business and personal name on it so I'm not sure if again that increases my exposure because by extension some business is involved, albeit indirectly.

If I decide to go with a CPA or account I assume then if I don't plan to report I can't event mention I am collecting rent or do I and tell them I don't want to report. I think they are obligated to report...I don't know??

You *do* have a business thought...you are a landlord renting out a room. And you have a W-2 from your employment income. You have both types of income.

LightStache

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Re: Rental reporting and rent money
« Reply #12 on: January 29, 2022, 05:36:19 PM »
One thing that concerns me that never hit me before was the fact that my tenant pays me by check but the name on the check appears to have another family memberís name and below it literally has DBA and a business name. The signature on the check is not his own. The memo line of the check indicates itís for so and so month rent. My tenant is a young medical professional which I have independently confirmed, and I donít know his exact connection to this person or DBA listed. I suspect perhaps itís coming from a parentís account and they may be doing it this way for ďtaxĒ purposes. I donít why I didnít question is earlier but does accepting payment in this way affect me at all?

No I don't think accepting payment that way affects you in terms of taxes. You don't know whether they're deducting the payments as a business expense and it's not your responsibility. It's a little fishy, but I can imagine some circumstances where it would be legit.

But I don't think filing a Sch E is complicated and I would do it. If your W2 income is below the phaseout limit, you can deduct Sch E losses against your W2 income. And if you use cost segregation, you could probably generate substantial tax savings, especially for the first year.

https://www.kbkg.com/residential-costsegregator

That's my fear about once I report I have all these other pesky complications like depreciation recapture and I read somewhere now my capital gains exemption for single individual is cut in half unless I go some period of time I think like 3 of 5 years without renting.

I mean you might see depreciation as a "pesky complication" but people make billions by seeing it as an awesome benefit. I've paid it and it's really NBD. And I don't think that's correct about the capital gains exemption being cut in half. If the house remains your primary residence, then the exemption should be unaffected.

secondcor521

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Re: Rental reporting and rent money
« Reply #13 on: January 29, 2022, 05:58:55 PM »
AARP Foundation Tax Aide tax preparer here, so I theoretically train on and know some of this stuff.  Lots of misinformation on this thread, which I'll try to correct:

1.  Regardless of what your renter is doing and who is paying you, it's rental income to you, and unless it's less than 14 days (Augusta rule), must be reported on your tax return.

2a.  If you came in to use our services and mentioned the rental income to me but said you didn't want to report the income, I would immediately stop the process, inform you it was tax fraud, and refuse to prepare your return.  I also would not help you in any way other than to encourage you to report all income.  In fact, I had to do that to someone last year who came in and mentioned some income but didn't want to report it.  Even if the amount is only $1.  Any quality tax preparer would, I think, do the same.

2a.  I wouldn't trust anyone who is willing to help you commit tax fraud to prepare a return even semi-properly.  In other words, in addition to the rental tax fraud you might compound your problems with other mistakes on the return.

2c.  I wouldn't report you to the IRS, but someone else - including a tax preparer, a friend, an acquaintance, or your renter - might.  Last I looked, a whistleblower could receive 15% of the taxes collected from a tax fraud.

3.  You're not required to take depreciation.  However, you will be required to pay depreciation recapture on the depreciation whether taken or not.  And depreciation generally reduces current taxes.  So most people go ahead and take all the depreciation to which they are entitled.

4.  If audited, you can't claim ignorance.  And there is the possibility of being prosecuted and jailed for tax fraud.  Even if you're a small fish, the IRS might choose to make an example out of someone, and that someone might be you.

5.  Note that if you deduct mortgage interest on Schedule E (which I'm not sure, but it seems plausible you could), then you probably can't also double-dip and report that same interest on Schedule A.  You'd have to apportion it appropriately between the two schedules.

6.  Generally depreciation recapture is taxed at a different rate than capital gains.  I believe you'd pay depreciation recapture then also any applicable capital gains when you go to sell.

7.  You're confused about the capital gains exclusion.  The basic rule is if you own and live in the house 2 of the last 5 years when you sell and have not taken excluded another home sale gain in the past two years *and have not used the house for home office or a rental* then you get the full exclusion, which is $250K for a single person.  Having a rental (or home office that you've deducted) will impact the capital gains exclusion.  The calculations are rather involved; see Pub 523 for details at https://www.irs.gov/publications/p523#en_US_2021_publink100077087.

I'd agree with a previous poster - pay someone to do it correctly this year, then learn how to fill out Schedule E yourself.
« Last Edit: January 29, 2022, 06:07:15 PM by secondcor521 »

LightStache

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Re: Rental reporting and rent money
« Reply #14 on: January 29, 2022, 06:09:53 PM »
7.  You're confused about the capital gains exclusion.  Generally if you own and live in the house 2 of the last 5 years when you sell and have not taken excluded a home sale gain in the past two years *and have not used the house for home office or a rental* then you get the full exclusion, which is $250K for a single person.  Having a rental (or home office that you've deducted) will impact the capital gains exclusion.  The calculations are rather involved; see Pub 523 for details at https://www.irs.gov/publications/p523#en_US_2021_publink100077087.

Publication 523, where it says ...

"Space within the living area. If the space you used for business or rental purposes was within the living area of the home, then your usage doesn't affect your gain or loss calculations (except for an adjustment to basis for depreciation, taken after May 6, 1997, to be recaptured and reported as ordinary income). Examples of spaces within the living area include a rented spare bedroom and attic space used as a home office.

...

Business or rental space that is separate from the living area affect your gain/loss calculations. Examples of space not within the living area include a first-floor storefront with an attached residence; a rented apartment in a duplex; or a working farm with a farmhouse on the property."

secondcor521

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Re: Rental reporting and rent money
« Reply #15 on: January 29, 2022, 06:29:08 PM »
^ Right.  When I wrote "you are confused" I was referring to the OP saying the exclusion was cut in half.  That part of my reply was directed only at the OP, not anyone else on this thread.  As is clear from even a quick perusal of Pub 523, the calculation is more complex.

clifp

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Re: Rental reporting and rent money
« Reply #16 on: January 29, 2022, 07:10:03 PM »
If you were getting paid in cash, or bitcoin perhaps you could get away with it. But getting paid by check, it is pretty risky, not to mention illegal.
The IRS is going to see two tax forms from the same address by single tax filers, one is a homeowner and the other isn't. It doesn't take Google level AI on the part of the IRS computers, to make an educated guess of what is going on.

Have a CPA set it up correctly for you, he probably will pleasantly surprise you and the deduction you are allowed to make. Then use Turbotax in future years.

Dee18

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Re: Rental reporting and rent money
« Reply #17 on: January 29, 2022, 07:32:10 PM »
Willful failure to report that rental income is a Federal felony under 26 U.S.Code Section 7203, punishable by a fine and up to 5 years in prison.  I am shocked at how many people are encouraging you to knowingly violate federal law.

YttriumNitrate

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Re: Rental reporting and rent money
« Reply #18 on: January 30, 2022, 10:55:14 AM »
If you were getting paid in cash, or bitcoin perhaps you could get away with it. But getting paid by check, it is pretty risky, not to mention illegal.
The IRS is going to see two tax forms from the same address by single tax filers, one is a homeowner and the other isn't. It doesn't take Google level AI on the part of the IRS computers, to make an educated guess of what is going on.
Doesn't every unmarried couple living together file two separate tax returns from the same address? Level and consistent payments between the two parties may suggest some sort of rent being collected, but it could just be splitting of expenses. If my boyfriend sends me $800 a month, is he paying rent or is he just covering his portion of utilities, pets, food, subscriptions, travel, etc.?

clifp

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Re: Rental reporting and rent money
« Reply #19 on: January 30, 2022, 11:17:25 AM »
If you were getting paid in cash, or bitcoin perhaps you could get away with it. But getting paid by check, it is pretty risky, not to mention illegal.
The IRS is going to see two tax forms from the same address by single tax filers, one is a homeowner and the other isn't. It doesn't take Google level AI on the part of the IRS computers, to make an educated guess of what is going on.
Doesn't every unmarried couple living together file two separate tax returns from the same address? Level and consistent payments between the two parties may suggest some sort of rent being collected, but it could just be splitting of expenses. If my boyfriend sends me $800 a month, is he paying rent or is he just covering his portion of utilities, pets, food, subscriptions, travel, etc.?

I think you answered your own question if he is sending your $800/month every month it is probably rent, if it varies it is probably is splitting expense, cause $800 seems like a lot for the things you mentioned. Either way, it is a legitimate question for an IRS agent to ask.  Now in today's understaffed IRS is it going to be asked probably not.

Tester

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Re: Rental reporting and rent money
« Reply #20 on: January 30, 2022, 10:21:36 PM »
Let me ask you a question: how much more tax will you pay if you report the rental income?

Now the next question: does that amount justify being stressed to be caught with tax fraud?

And final one: does that amount justify the worst case scenario, where you are punished to the maximum extent of the law if you get caught?