My parents are going to pay me rent in cash every month. Do I need to claim that money as income on my taxes?
Yes, and no exceptions apply to that requirement either.
Can I claim it as a gift?
No, because it is not a gift any way you look at it. A gift is something given freely by the giver for nothing in return. Your parents are getting something in return. So this is not a gift any way you look at it.
Can I use it to pay my credit cards monthly?
What you do with the money is your business. The IRS could care less so long as your pay your taxes.
Or should I make the status of my home a rental home and go that route?
You don't really have a choice here on the legal front. It is a fact that it is a rental, and it can be proven because you receive compensation from another for it's use/occupancy.
They are paying the HUD market value but its not the real market value of what I could make.
Then would it be accurate to state that you are renting the property at "well" below it's FMRV? If so, there are consequences.
They are just paying the mortgage and utilities so I'm not making money.
Contrary to what you may think, you "are" making money. Though in the end you won't pay taxes on it because of rental expenses and depreciation you are required to take by law. Out of the mortgage payment, the principle part of that payment "is" taxable income (in a sense) to you. Only the mortgage interest is deductible. So you "are" making money. The fact you use that money to pay for the house (minus the interest) is irrelevant. A few things you need to be aware of here.
As you may be aware, all rental income/expenses is reported on SCH E as a physical part of your personal 1040 tax return. In the end, it is "EXTREMELY" uncommon for residential rental real estate to "EVER" show a taxable profit. That's because when you add up your rental deductions of property insurance, property taxes, mortgage interest and add that to the depreication you're required to take by law, it is extremely common for those deductions to exceed your total rental income for the entire tax year. Add to that the other rental expenses you're allowed to take if you pay them (repairs, maintenance, etc) and you're practically guaranteed to "NEVER" make a taxable profit on rental property. But you "will" have cash flow.
So ever year your rental deductions (called losses) will reduce your taxable rental income to ZERO, and any remaining losses just get carried over to the next year. That means with each passing year your carry over losses keep growing and accumulating. You don't get to "realize" those losses until the tax year you sell the property.
IN the tax year you sell the property your losses are first deducted from any taxable gain realized on the sale. If that gets your taxable gain to zero, then any remaining losses can be deducted for other "ordinary" income (such as W-2 wages) up to a maximum of $3000 per year until all those losses are used up. However, your situation won't get that option.
When renting at below FMRV and "especially" when renting below FMRV to family, your allowed losses are limited to the rental income received. Carry over losses are not allowed. You just "lose them" permanently and forever. So in the tax year you sell the property, you can fully expect to be taxed on every single penny of any gain realized on the sale.
So that's it for how the future is going to look on this. Below is details and clarifications you will need in order to set this up correctly in TurboTax, assuming 2019 is your first year renting this property out.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
