Author Topic: roommate tax implications  (Read 4688 times)

ambimammular

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roommate tax implications
« on: April 27, 2016, 11:08:37 AM »
Ok, so, we're putting a little MIL room above our garage. It will have shared water, but a separate water heater, its own entrance, and no access to the backyard. We're talking about getting a roommate for the school year (we're in a college town), furnishing the space, and providing utilities/internet.

Our questions are about tax obligations. If we were all sharing a living room, kitchen, and utilities, but only my name was on the paperwork I wouldn't think of their payment as income. But our plans seem more renter/landlord-like because we're not sharing common rooms. And there I would be paying taxes on the income.

Because all utilities are included (there isn't really a good way to parse them out) then part of their rent payment (the difficult to separate utility part) shouldn't be counted against me as taxable income, right?

I'd like to do this as simply as possible. I don't want to do something so drastic as form a c-corp or s-corp just to have some help with the mortgage each month. But I don't want to do anything illegal either. Who knows if we'll even like having a random person staying on the property. This is just dipping my toe in the water.

Are there different rules for roommates vs, renters?

Shor

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Re: roommate tax implications
« Reply #1 on: April 27, 2016, 12:00:55 PM »
You should be reporting it as rental income (schedule E), you don't need to form a corp to do this, and most people don't for one-off renting.
When a person owns multiple properties, deals with many tenants, has to deal with eviction issues, and is deducting expenses for use of their property that's where the corp part is useful as a means of separation

You might be able to deduct a portion of the house for its usage, but you will probably opt to simply absorb the cost to keep your taxes simpler.
Similarly, you might be able to deduct a portion of utilities, and again you will probably opt not to.
Just take the base rent * 12 and that's the additional income you will want to report to the IRS. You don't need to report the utilities charged, and if you don't deduct expenses for use of the house I would say that covers everything.

In this case, there are different rules in that you own the property and are renting out the space. The renter is not related to you, or your dependent and they are giving you money for rent each month. It is also not a case of shared costs (i.e. roommates splitting rent / utility) so it falls under additional income.

ambimammular

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Re: roommate tax implications
« Reply #2 on: April 28, 2016, 11:02:46 AM »
Just what I needed to know!
Thanks, Shor!!

jwright

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Re: roommate tax implications
« Reply #3 on: April 28, 2016, 01:36:08 PM »
You are going to have to report the rental income on Schedule E; I dont' know why you wouldn't deduct expenses.   Report the total paid as rental income.

I would calculate the percentage of total square footage of the rental unit versus total home square footage.  Use that percentage to allocate electricity, water, internet, and other shared costs as rental expenses to be deducted against rental income.  You will also want to depreciate the cost of the rental unit.  If you built from scratch recently, then you know the total cost.  If it is part of your original home purchase, use the same percentage to as the cost basis.

forummm

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Re: roommate tax implications
« Reply #4 on: April 29, 2016, 08:15:09 AM »
You are going to have to report the rental income on Schedule E; I dont' know why you wouldn't deduct expenses.   Report the total paid as rental income.

I would calculate the percentage of total square footage of the rental unit versus total home square footage.  Use that percentage to allocate electricity, water, internet, and other shared costs as rental expenses to be deducted against rental income.  You will also want to depreciate the cost of the rental unit.  If you built from scratch recently, then you know the total cost.  If it is part of your original home purchase, use the same percentage to as the cost basis.

If you depreciate, but it's also your primary residence, do you have to pay capital gains when you sell?

ambimammular

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Re: roommate tax implications
« Reply #5 on: May 01, 2016, 08:55:21 AM »
It's our primary residence, so I don't want to bother with the depreciation. I'm not even sure if we'll like sharing our space with someone yet. All it would take would be a guy who loves loud music late and night and is late on the rent and we might be nope, nope, nope.

I'm also kind of nervous about getting sued because he stubs his toe or sets the oven on fire. I'm guessing we just get an umbrella policy to cover a renter. ?

jwright

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Re: roommate tax implications
« Reply #6 on: May 02, 2016, 01:19:48 PM »
You are going to have to report the rental income on Schedule E; I dont' know why you wouldn't deduct expenses.   Report the total paid as rental income.

I would calculate the percentage of total square footage of the rental unit versus total home square footage.  Use that percentage to allocate electricity, water, internet, and other shared costs as rental expenses to be deducted against rental income.  You will also want to depreciate the cost of the rental unit.  If you built from scratch recently, then you know the total cost.  If it is part of your original home purchase, use the same percentage to as the cost basis.

If you depreciate, but it's also your primary residence, do you have to pay capital gains when you sell?

Yes, you would potentially have to deal with depreciation recapture.  But the IRS statute reads that you have to recapture "allowed or allowable" depreciation so even if you didn't deduct, you should have the same tax implications because it was allowable.

Also, the max for depreciation recapture is 25% where as the max for the deduction is 39.6%.  There are going to be scenarios where you are deducting at a higher rate than the capital gain, so it is still beneficial to you.

electriceagle

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Re: roommate tax implications
« Reply #7 on: May 02, 2016, 03:57:41 PM »
Our questions are about tax obligations. If we were all sharing a living room, kitchen, and utilities, but only my name was on the paperwork I wouldn't think of their payment as income. But our plans seem more renter/landlord-like because we're not sharing common rooms. And there I would be paying taxes on the income.

Because all utilities are included (there isn't really a good way to parse them out) then part of their rent payment (the difficult to separate utility part) shouldn't be counted against me as taxable income, right?

Are there different rules for roommates vs, renters?

The income is taxable on Schedule E regardless of whether you share a living room, kitchen, etc with a tenant. The only time that roommate income is not taxable is when you split rent with someone in a no-profit situation (you and roommate split a $1000 apartment; you collect $500 from roommate and send $1000 to the landlord).

You should take depreciation; you'll get charged for it when you sell, even if you don't take it.