We have a unique situation and will need some advice on filing taxes soon. We currently rent our primary residence (awaiting our last child to finish high school) and this year (June 2020) purchased a 'second home' about 2 hours away so that our college student could live more affordably and we could have an investment. our mortgage is $1305/month and we charge her two roommates $500/month. So we are not making any money on this, but it has reduced our college expenses. We do cover about $350 /month for her part of rent through the school year (9 months), and she is responsible for the $500/month for the summer months (3 months). So wondering if we will be able to claim mortgage exemptions and such as this is a second home (but the only home we own) and we aren't making any income on it. Thanks in advance!
Yes, the mortgage interest and property tax on a 2nd home are allowed as itemized deductions. The property is classified as a 2nd home, rather than investment property, since it is being used by family ("personal use").
A second question is: do you have to declare the rent from the room mates as income? Simple answer: 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 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 mates has full run of the house, and there's just the 3 of them, then two thirds of 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 2nd 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.
@megmcginness You may want to review the rules on 'personal use' so that nothing runs afoul of the IRS.
suggest reviewing this link from the IRS....and walking through the importance of "personal use" to differentiate a 2nd home from an investment property.
it may get complicated if you are renting to all 3 at market rents for the summer as there is no "personal use" based on the IRS definition.
they define 'personal use' of the 2nd home and note:
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.
You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). However, see Days used as a main home before or after renting , later.
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 his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half brothers and half sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
Anyone under an arrangement that lets you use some other dwelling unit.
Anyone at less than a fair rental price.
so this definition says it's okay to say the home is a 2nd home if a family member is being charged less than market rent. But it's not personal use if the family member is being charged market rent. Depending on your objective, would it be worth charging your daughter below market during the summer as well; alternatively charge her $125 per month for all 12 months? ....that way there is no question that there was personal use all year long.
We have a unique situation and will need some advice on filing taxes soon. We currently rent our primary residence (awaiting our last child to finish high school)
I'm assuming that you "PAY" rent for your primary residence. Therefore, you do not own your primary residence. This has nothing to do with your query, actually.
and this year (June 2020) purchased a 'second home' about 2 hours away so that our college student could live more affordably and we could have an investment.
Either you have purchased a 2nd home for personal use, an investment property, or in uncommon (but not rare) situations you have a "mixed use" investment property.
our mortgage is $1305/month and we charge her two roommates $500/month.
So based on 3 people living in the house and only two of them pay rent, it would appear to me that you "are" renting at FMRV (Fair Market Rental Value). But since your college student lives there rent free, that means the property is not 100% business use. It's 66% business use.
So we are not making any money on this, but it has reduced our college expenses.
That may or may not be true. Remember, the principle part of your mortgage payment is not a deductible expense of any type. It's taxable income. However, having recently purchased the property I would expect the principle part of each payment to be extremely low - like less than 10% of the total payment. There are also other factors not discussed here (such as depreciation) that delay you paying taxes on the taxable income until later down the road. Depreciation is an example of one common "delay" tactic.
We do cover about $350 /month for her part of rent through the school year (9 months),
Actually, you don't cover anything for anyone else. You are "in fact" providing support to your college student and in your case, you can actually put a dollar amount of $350/mo on that support you provide.
So wondering if we will be able to claim mortgage exemptions and such as this is a second home (but the only home we own) and we aren't making any income on it. Thanks in advance!
The property is producing income. The taxability of that income just flat out doesn't matter. It's still income that has to be reported. With the property being 66% business use that means that 66% of all expenses are a deductible rental expense. So on the SCH E you can claim 66% of your property taxes, 66% of the mortgage interest, 66% of the property insurance and 66% of all other expenses.
The other 33% of property taxes and mortgage interest are a SCH A itemized deduction subject to the SALT limits. The 33% of other expenses are not deductible at all.
and she is responsible for the $500/month for the summer months (3 months).
That adds a new wrinkle that can be handled any one of several ways. Technically, for the summer months that makes the property 100% business use and the fact that one of your renters is a family member *does* matter.
Me personally, while I may or may not report the rental income from my child for those three summer months, I'd keep it at 66% business use the whole year. Besides, whatever path I follow, my student/child will still qualify as my dependent on my tax return anyway. That means my student/dependent is just flat out not legally eligible for the stimulus payment, no matter what we do.
So yes, it is a second home, and we are charging far less than market value for all 3 students. Even if our daughter 'contributes' $500 for the summer months, it is still below fair market value. So it seems to me the brake even (zero) scenario makes sense..
Thanks for the reply! So, even when she pays the 500$ for those 3 months, the rate for all 3 tennants is still below fair market value (by $150-$200). This was our arrangement with them, to make it fair and keep it simple for our taxes, etc. So thinking we are ok? Granted this just started this year, and she moved in July 1, and we just purchased June 15th, so really we won't have to reconcile the summer month increase until we file for 2021. Thinking we have this set up correctly as a second home vs. an investment property. We are definitely not making any money, in fact spending some and chalking that up to her college expense/trade-off.
Thank you for the reply! Yes our mortgage is $1305, we effectively are charging two roommates $500 each and our daughter (we cover the difference to meet the mortgage-$350). We do not have a 'lease signed' for our daughter, but we do for the other 2. The rent should actually be $1650-$1800, so I would say we are below market value. We may revisit the summer month agreement. That is in place, simply for her to understand budgeting and the cost to live off campus, and have her have 'some skin in the game' so she appreciates the luxury of living in a great house off campus. 🙂