Author Topic: Help! Renting out our guest room to a friend.  (Read 1669 times)

afuera

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Help! Renting out our guest room to a friend.
« on: May 11, 2017, 03:10:37 PM »
Hello wonderful forum friends!  I need some advice and I was hoping y'all could help point out anything I may be overlooking.

One of our friends got a contract job in our area and wants to live with us!  He wants to pay us rent (since he will be getting a stipend) so we told him what our mortgage payment and utility costs were and he suggested he pay us $800/mo.  He is also bringing his doggo which will be great because our doggo will have a friend while we are at work all day :).  I'm not sure how long this situation is going to last whether it will be 6 months or 2 years.  Our neighbor was preparing to rent out their house and offered to write up a lease/contract type of thing (that he needs for the stipend) similar to the one they have.

Any tips on what we should include in the lease thingy?  This is a very good friend (groomsmen in our wedding) so not really concerned about CYA but thought I would ask the hive mind.

Also, what are the tax implications for getting rental income?  Obviously we are going to pay taxes on it but should we open/make a LLC (I know nothing about this) so that we can do fancy tax things.  What other options are there?  Hopefully some of you can point me in the right direction.

nereo

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Re: Help! Renting out our guest room to a friend.
« Reply #1 on: May 11, 2017, 03:20:16 PM »
You should have a signed rental agreement to protect both parties. I would also update your homeowners insurance policy to reflect the change.  This way if something happens (he falls down the stairs - the bathtub overflows - whatever) it's covered.

Yes, you need declare it on your taxes.  You can deduct expenses on the portion of your home that you rent out, including any increase in homeowners insurance, AND depreciation on the % of the home that he rents.  yay!

afuera

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Re: Help! Renting out our guest room to a friend.
« Reply #2 on: May 11, 2017, 03:33:55 PM »
You should have a signed rental agreement to protect both parties. I would also update your homeowners insurance policy to reflect the change.  This way if something happens (he falls down the stairs - the bathtub overflows - whatever) it's covered.

Any specific big hitters we should make sure to include in the rental agreement?

Yes, you need declare it on your taxes.  You can deduct expenses on the portion of your home that you rent out, including any increase in homeowners insurance, AND depreciation on the % of the home that he rents.  yay!

What are the pro/cons from a tax perspective for creating an LLC?  I'm imagining fancy business credit cards and "business cost" deductions.

nereo

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Re: Help! Renting out our guest room to a friend.
« Reply #3 on: May 11, 2017, 03:58:30 PM »
You should have a signed rental agreement to protect both parties. I would also update your homeowners insurance policy to reflect the change.  This way if something happens (he falls down the stairs - the bathtub overflows - whatever) it's covered.

Any specific big hitters we should make sure to include in the rental agreement?

Yes, you need declare it on your taxes.  You can deduct expenses on the portion of your home that you rent out, including any increase in homeowners insurance, AND depreciation on the % of the home that he rents.  yay!

What are the pro/cons from a tax perspective for creating an LLC?  I'm imagining fancy business credit cards and "business cost" deductions.

I've rented out to friends and I use just a normal boilerplate document I got from my municipality. It's pretty basic, but as it's been explained to me it ensures that should there ever be an emergency/catastrophy/insurance claim both parties are covered.  It also helps prevent any bad blood down the road (i know i know, groomsman and all) by having it spelled out. It takes 15 minutes to fill out and sign adn there's seemingly no bad side.

I've never bothered with an LLC (yet) but my understanding is that it segregates your assets to offer you protection in the case of really bad things. Someone else might chime in with a better answer...

ETA;  duh, I forgot one of the most important reasons to have a rental agreement - it covers you for tax time.  One of the greatest benefits to renting out a room (besides the $800/mo) is that you can deduct expenses as well as the depreciation on the % of your home that you rent out.  That can save you several hundred$ on your taxes, offsetting or completely eliminating what you owe from the extra rental income.
« Last Edit: May 11, 2017, 04:13:39 PM by nereo »

afuera

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Re: Help! Renting out our guest room to a friend.
« Reply #4 on: May 15, 2017, 09:22:12 AM »
Anyone else over here have any insight on the pros/cons of an LLC?  Maybe I should cross post this over on AAM?

CareCPA

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Re: Help! Renting out our guest room to a friend.
« Reply #5 on: May 15, 2017, 09:48:20 AM »
If all you are doing is renting out a room in your house, I see little benefit to an LLC. To actually get protection, you would need to transfer the house into the entity (in PA this would incur a 2% transfer tax on the value of the house), plus you would need to maintain separation of LLC and personal finances. It just doesn't make sense to do for renting out one room.
Even without the LLC, you can still deduct a pro-rated amount of utilities, real estate taxes, etc. See https://www.irs.gov/publications/p527/ch04.html#en_US_2016_publink1000219159 for examples.