Rental income

[girlJammer1980]

My son lives in a house with his friend and the friend pays me rent and half of the utilities.  Do I report this as a rental property on Sch E and claim half the mortgage interest, taxes, etc?

[ColeenD3 · Accepted solution]

You would report your income as Other Income and take your mortgage interest and property taxes on Schedule A, along with your primary residence. PUB 527

Not Rented for Profit

If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

Where to report.

Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8. If you itemize your deductions, include your mortgage interest and mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

Presumption of profit.

If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

To add it as other income:

• Wages & Income
• I'll choose what I work on
• Less Common Income select Start (or Update) for 
• Miscellaneous Income.
• Other reportable income and you can enter your own description(s) and amount(s)

[girlJammer1980]

Thanks. I didn’t think a Sch E would be appropriate as it is basically considered “personal use”. I appreciate your input. 

[girlJammer1980]

What if I don't itemize my mortgage interest and property tax for the home that is being rented?  Do I report on the net  amount (income less mortgage interest less property taxes paid)?  I understand that I cannot claim a loss or depreciate this property.

[Hal_Al]

Q. What if I don't itemize my mortgage interest and property tax for the home that is being rented?  Do I report on the net  amount (income less mortgage interest less property taxes paid)?  

A. No. For a not for profit rental, you must do it the way ColeenD3 described. 

But, lets take another look at the basics. Do you really have a rental or do you have a roommates sharing expenses situation and nothing needs to be reported?  Are you charging fair market rent and is there a written lease?

Even it it is a rental, I'm not convinced that it is a not for profit situation.  You, maybe, should be using Schedule E.  But, you are correct, you cannot report a loss, because of the personal use rule. 

You have a 2nd home and the mortgage interest is deductible even if it isn't a rental.  Real estate taxes are deductible on any property.  So, you are not gaining any deductions calling it a rental. 

My standard answer for this situation follows.  

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Roommate  rental

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 2 of you, then half 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.

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.

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.

[girlJammer1980]

Thank you.  Your reply is very helpful.  

[wwisong]

he may be able to claim rental property expenses if he is the owner

[wwisong]

you can claim all expenses you paid.

[wwisong]

yes, that's correct.