Question

Do I need to report rental income from family? I live in half the home and they pay market value

Forum|Forum|4 years ago
November 13, 2021
2 replies
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The home is my primary residence and I live in half of it. I rent the upstairs as private bedrooms to several family members. I charge market value. My mortgage is around $1400 but they pay around $1200. Am I required to report this income?

Critter-3

If they are paying FMV (no matter what the expenses are on the property) then you have a rental that should be reported on the tax return Sch E.

Hal_Al

Employee

@Critter-3 's answer is probably correct. But it's not "for sure".

If this is merely a cost sharing arrangement where the amount paid is below fair market rental, there would be no reportable income to you. If the “rent” amount is fair market value, or more, there is still some question as to whether you have to report it, as it almost always comes out zero. Most people take the attitude that it is not income; it's just room mates sharing expenses and ignore it. Family, as opposed to unrelated roommates, makes that position stronger.

If what they pay you is FMV and more than "their share of the expenses", then it would be reportable income. Your mortgage payment is not your expenses. Mortgage interest, real estate tax, utilities, maintenance, insurance and depreciation (if needed) would be deductible expenses.

Here’s what you may be required to do:

Report the income (enter at Rents & Royalties/Income & expenses from Rental Properties); and then deduct the expenses on schedule E. The deductible expenses must be prorated for the portion of the house used by the renters. For example if you are renting 50% of the space, then 50% of the expenses would be deductible.

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.

It is possible for you to gain a positive tax effect from this activity; If enough of your schedule A deductions (mortgage interest & property tax) are shifted to Schedule E, and your standard deduction becomes bigger than your itemized deductions, you will have effectively saved on taxes.

If you have no mortgage, then there could well be profit involved, which you may have to offset with depreciation that could lead to "recapture" in the future when the property is sold.

https://www.irs.gov/publications/p527/ch04.html#en_US_2014_publink1000219159

TurboTax (TT) does not handle this properly. TT will not limit your deductions to your income. You have to do that manually. TT wants you to enter this as a “not for profit rental”, which does not use Schedule E and puts your expenses on Schedule A (itemized deduction). I'm of the opinion that's not the proper way.

Critter-3

Putting the income for a Not for Profit rental on the Sch 1 line 8 is the correct way to handle it and the expenses are deductions on the Sch A subject to the 2% limitation rule however that section of the Sch A is not allowed from 2018 thru 2025.

I agree ... if this is simply a cost sharing situation between family members then nothing should be reported on the income tax return at all.

A

Anonymous_

Employee

@Critter-3 wrote:
I agree ... if this is simply a cost sharing situation between family members then nothing should be reported on the income tax return at all.

I also agree with @Hal_Al and @Critter-3's statement above.

If you add up all of your typical homeowner expenses - real estate taxes, utilities, repairs/maintenance, insurance, mortgage interest, et al - the $1200 payment is probably only a fraction of the total. As a result, you and your family members are sharing expenses.