I have a very quick tax question. I own my home, pay the mortgage out of my own bank account etc. I have a roommate who pays me rent and his share of the utilities each month. He has no lease, just a verbal agreement, and pays by check each month.
Should I be reporting the income I receive from him? Is it considered ‘rental property’ even if I’m living in the same residence too? Do I only have to report the rent and not the utilities?
I live in North Carolina if that makes a difference and I’m contemplating how to do my taxes this year (CPA vs tax preparer vs DIY)
IANAA (Accountant) but from a conversation with a co-worker in just this situation, yes you really should consider the income from the roommate. I believe he had to consider the part of the house he rented as “rental property” - e.g. if his roommate was using half the house, then half his expenses (mortgage, utilities etc.) had to be weighed against the rent the roommate paid. The other half of the mortgage could be treated like a regular mortgage (i.e., he could deduct it etc.).
I don’t know how many people bother with this accounting, honestly… but if you do it right, then at least you don’t have to be looking over your shoulder for the IRS to come calling.
Strictly speaking, the money he pays to you is income, and the extra cost of his utilities is an expense that you incur as a landlord which can be offset against this income. Assuming that you’re making a good-faith effort to match his payments to his actual utility costs, however, I think that you could get away with saying that he’s paying for his own utilities directly (as you would with an apartment where utilities weren’t included), and report neither the income nor the expense. However, IANA tax accountant.
The other expense that you incur is the mortgage. Interest on a mortgage on your personal residence is an itemized deduction against ordinary income. Interest on a mortgage on rental property is a business expense to be offset against rental income. You have one mortgage on property that doubles as a residence and rental property. The consequences of either treatment of the mortgage interest aren’t a whole lot different, but I’d seek more authoritative guidance as to the best way to handle your situation.
I was afraid of that… I suppose I should fork over the cost of getting a CPA, at least for this year. Although I imagine I’m going to end up owing money.
See an accountant, pronto. Possibly even a lawyer.
You are running a business out of your home. You are also a landlord as well. There may be greater implications if the city where you live has not zoned your area for multi-family living in the same building, or whatever the technical term may be. While the agreement with your roommate is just a handshake, and it appears you both get along, you should always prepare for the worst.
If the both of you have a falling out, what is the worst than can happen? For your roomie, they have to find another place to live. For you, your roomie could report you to the city and/or the IRS. If your roomie where to become injured on your property and sues, how would your insurance company handle it when they don’t know about the arrangement?
The cost of paying a CPA and/or a lawyer for some good advice is peanuts compared to what it might cost you otherwise.
Dammit Duckster, now you’ve got me worried. Fortunately, we’re both resident physicians, if he got injured and sued he’d have to deal with the who medical community. And fortunately, he practically lives with in the hospital or with his girlfriend. Unfortunately, you are absolutely right.
This is the crux of the issue. If your roomie shuts up and isn’t the vindictive type, the chances of the IRS finding out about your arrangement is pretty much nil. When I lived abroad I had such an arrangement with my landlord (the tax laws were similar). I was a “friend” living for “free” as a “guest” in her home, while I paid her rent untaxed. Nobody was the wiser. Pretty typical set-up out there.
I know plenty of people who have had such arrangements with family. Son living at home at 25, pays parents rent, nobody reports. It’s not unusual. But, yes, it is technically illegal. That income you receive should be taxed. Now, whether the IRS can find out about it is another story. The safe play, of course, is to report it.
I report my roommate-income, and my accountant lets me depreciate the house and maintenance expenses (this may make a difference in basis when I sell, but I don’t understand what that difference is; people don’t necessarily do this). I think he calculates the mortgage interest in the usual way. I didn’t change my homeowner’s insurance when on starting this.
I think a lot of people do it Valgard’s way. Renting out a room is “allowed”, per a lady of my acquaintance.
IANAA, IANAL, IANAIRSE, and I might not be doing everything right.
Well, yes & no. If he is paying you rent- then it is taxable (there are some exceptions for short term renatals).
BUT- if you are “roomies” and you are "sharing living expenses’ then- no. It depends heavily on the nature of your relationship and how & why the “rent” is paid.
So- for example- your ex-college frat brother/cousin/ex-girlfreind has been staying with you, and since he still has some income, you figure out that “x” amount per month would be his 'share". That’s not “rent”. You’re just splitting the expenses. In pulykamell’s example with the 25yo son, it would be most likely considered 'sharing living expenses", especially as the “rent” is likely less than FMV.
OTOH, if you don’t know this guy from Adam, advertise “room for rent” and will replace him when he goes- then, yes, you’re getting “rent”. This sounds like your situation, but…
Do note that with depreciation and other expenses, you’re likely losing money on this (on paper, anyway). Thus, there’d be no net Taxable income. Thus- the IRS doesn’t really care all that much- until you try and claim the loss.
YMMV. Consult a Tax professional- one with letters after his name (C.P.A. E.A., etc)
My fear with not reporting my roommate’s contribution, is that the IRS could probably quite easily look at my reported income, my mortgage payment and probably some other easily available numbers and figure out that I shouldn’t be able to live like I do with the money I’m making. Then it’s Audit Time.
