We rent 1/3 of our resid. to our adult child. Should I put our full mort. int. paid in TT's "report mort. int." rental exp. interface, just her portion of int., or none?

[Irene2805]

Treat the 1/3 of your house you are renting as if it were a separate rental property.  Enter the rent paid, and 1/3 of the taxes, mortgage interest, etc. on Schedule E.  

[peterstephens429]

Thanks, @Irene2805 ! Does that mean I reduce the amounts from my mortgage company's 1098 to 2/3's of its reported interest, taxes, etc. for my itemized deduction (which I qualify for)? If I must reduce it, is it generally better to put the rental portion of interest, taxes on Sch. C or E (if I have a choice)?

[JamesG1 · Accepted solution]

You are not required to report mortgage interest against Schedule E but if you do, the allocation to Schedule A must take place.  Here is an example using your 2/3 – 1/3 standard.

1098 mortgage interest of $6,000 means 2/3 to Schedule A $4,000 and 1/3 to Schedule E $2,000.

You may assign:

• The total cost to Schedule A, or
• Allocate between Schedule A/Schedule E,

As you prefer or as the numbers work to your advantage.

The above presumes that you are reporting rental income and expense at full market value and not at a reduced rate for a relative.

[peterstephens429]

Thank you so much, James and Irene! Your answers have cleared it up for me.

[Hal_Al]

You report nothing on your tax return.  You do not have a rental situation.  You merely have family sharing expenses.

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 stronger.

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. If the room mate has full run of the house, and there's just the 3 of you, then a third your expenses are deductible (mortgage interest, property taxes, insurance, utilities, repairs, and depreciation [if needed}). Your net income will usually be less than zero.

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.

[peterstephens429]

@Hal_Al , thank you. Do you know what would determine whether I would report nothing (your paragraphs 1 and 2) or whether I would report income and expenses (your paragraphs 3 and 4)? Our adult daughter pays regular rent but pays nothing else for expenses.

Thanks again,

Peter

[Hal_Al]

Two issues usually determine that: 1. do you have a profit motive in calling it rent and 2. are you charging fair market rent (or more).

As a  practical matter, If after deducting all allowable expenses, you are showing a profit, you probably have a rental situation.  If you are showing a loss, you don't. 

You may be calling it rent, others would call it helping with expenses by paying a fixed amount (as opposed to dividing up the bills each month). 

[peterstephens429]

@Hal_Al Thank you so much. That's extremely helpful.

Peter