I’m considering buying a home, but only have direct need for one bedroom. I know that I can deduct the interest on mortgage payments for a home, but that it doesn’t work the same way with rental properties. If I’m living in the home and also renting part of it, how does the tax work?
(Yes, I realize I’m asking for tax information on the internet; I’ll of course verify everything before it becomes potentially a huge mistake, but still interested in your answers)
Renting out a room doesn’t change the fact that you can deduct your mortgage interest and property taxes but it does affect how you’d report it. And while there are some other potential tax benefits there are also some significant complications as well.
First off, though, if you are just doing this to share the costs such as in a roommate situation then the IRS isn’t interested. You don’t report their share of the costs that they pay as income and take no additional deductions for your costs. That’s actually the best way to handle things in most cases actually.
If you are doing this to generate income, such as running a boarding house then, the income you receive from your tenant(s) is reported on Schedule E. You take a deduction on Schedule E for the proportional share of the business use of your home for the utilities, repairs, insurance, mortgage interest, property taxes, depreciation, etc. The home mortgate interest and property taxes would be split between Schedule A and Schedule E.
The item you have to watch out for here is the depreciation deduction. Sure, it will save you a few tax dollars now, maybe, but when you sell the home that depreciation is recaptured and is taxable. The tax rate on depreciation recapture is higher than the usual long-term capital gains tax rate, up to 25% instead of 15%. And you must pay the tax on the depreciation recapture EVEN if you qualify for the exclusion on the sale of a personal residence. And that’s not the filal "gotcha" here either. Even if you don’t claim a depreciation deduction now, it is STILL recaptured at sale time. The wording on it is "depreciation allowed or ALLOWABLE" (emphasis mine) when it comes to depreciation recapture.
Tax tip: Simplify your life. Call him or her your roommate. Any minimal tax benefit isn’t worth handling it any other way.
You will have to report any monies gained on the rental probably.
References :
Renting out a room doesn’t change the fact that you can deduct your mortgage interest and property taxes but it does affect how you’d report it. And while there are some other potential tax benefits there are also some significant complications as well.
First off, though, if you are just doing this to share the costs such as in a roommate situation then the IRS isn’t interested. You don’t report their share of the costs that they pay as income and take no additional deductions for your costs. That’s actually the best way to handle things in most cases actually.
If you are doing this to generate income, such as running a boarding house then, the income you receive from your tenant(s) is reported on Schedule E. You take a deduction on Schedule E for the proportional share of the business use of your home for the utilities, repairs, insurance, mortgage interest, property taxes, depreciation, etc. The home mortgate interest and property taxes would be split between Schedule A and Schedule E.
The item you have to watch out for here is the depreciation deduction. Sure, it will save you a few tax dollars now, maybe, but when you sell the home that depreciation is recaptured and is taxable. The tax rate on depreciation recapture is higher than the usual long-term capital gains tax rate, up to 25% instead of 15%. And you must pay the tax on the depreciation recapture EVEN if you qualify for the exclusion on the sale of a personal residence. And that’s not the filal "gotcha" here either. Even if you don’t claim a depreciation deduction now, it is STILL recaptured at sale time. The wording on it is "depreciation allowed or ALLOWABLE" (emphasis mine) when it comes to depreciation recapture.
Tax tip: Simplify your life. Call him or her your roommate. Any minimal tax benefit isn’t worth handling it any other way.
References :