renting vs cost-sharing with a roommate or family member

Forum|Forum|2 years ago
May 19, 2023
2 replies
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While I understand that rental income at a fair rental value is considered "rent" for the purposes of the IRS, is there a difference when the roommate is paying significantly less than the fair rental value that one would otherwise receive if renting a room out to someone?

To put it another way... Is the (significantly less than normal rental) cost-sharing amount considered as "rental income" in the eyes of the IRS? If not, what type of "income" would it be considered?

Is it even considered "income" at all, since it is simply splitting bills and other costs of living at a given residence?

I've researched IRS pub 527 and IRS pub 946, but the above still seems less than clear.

Any help would be so greatly appreciated. Thank you in advance for your time!

Not A Product Question

Hal_Al

Employee

Q. Is the (significantly less than normal rental) cost-sharing amount considered as "rental income" in the eyes of the IRS?

A. No.

Q. If not, what type of "income" would it be considered?

A. It is not income, at all.

Q. Is it even considered "income" at all, since it is simply splitting bills and other costs of living at a given residence?

A. No.

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 even 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 even stronger.

TomD8

Employee

To support @Hal_Al 's answer:

From IRS Publication 527, page 19:

"If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function isn’t considered to be a rental and it shouldn’t be reported on Schedule E (Form 1040). You aren’t required to report the rental income and rental expenses from this activity. Any expenses related to the home, such as mortgage interest, property taxes, and any qualified casualty loss, will be reported as normally allowed on Schedule A (Form 1040)."

A day rented below FMV is not a rental day.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.

mkenney17Author

Thanks, TomD8 and Hal_Al!

So, in the case of the text you shared, if all that one does is cost-share with someone, and never charges actual “rent” at FMV, would it mean that the home which the owner uses as a primary residence while sharing costs with another is NOT considered to be in service as a rental property (and thus, depreciation does NOT become necessary)?

NCPERSON1

just adding to the thread, the IRS does state that a day of rental below FMV is not a date of rental, but rather a day of personal use. So, in effect, each day is either a day of personal use or a day of rental - they are distinct and disjoint:

Left side: page 18:

https://www.irs.gov/pub/irs-pdf/p527.pdf

What is a day of personal use? A day of personal use of a dwelling unit is any day that the
unit is used by any of the following persons.
1. You or any other person who owns an interest in it, unless you rent it to another owner as their main home under a shared equity financing agreement (defined later). However, see Days used as a main home
before or after renting, later.

2. A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as their main home and pays a fair rental price. Family includes only your spouse, siblings, half siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children,
grandchildren, etc.).

3. Anyone under an arrangement that lets you use some other dwelling unit.
4. Anyone at less than a fair rental price