Can an owner also live in a rental property?
July 22, 2012 1:15 PM   Subscribe

Can I classify my house as a rental if I turn my mother into a tenant?

Currently, my mother and I are 50% owners of the house we live in. I also use a room as my home-based office. If we transferred 100% ownership to one of us, could the new 100% owner then classify it as a rental property with the the person being the tenant?

Can you have a rental property for tax purposes where the owner also lives in the house? We're in California if that matters.
posted by KimikoPi to Work & Money (6 answers total)
I would talk to a California attorney about this.
posted by J. Wilson at 2:32 PM on July 22, 2012 [2 favorites]

There are owner occupied rentals. However your town or city may make it hard to one day take the property off the rental market, so yes, talk to a pro, specifically one familiar with taxes and local rent laws.
posted by zippy at 2:39 PM on July 22, 2012

The preceding advice is prudent--assuming it does not violate any local zoning/rental laws etc I would guess the most important factor for Federal tax purposes is that you fully and accurately report rental income that your mother pays. It must be based on fair market value--you can not deduct legitimate expenses and depreciation if you are not charging (and being paid) legitimate rental income. Also. please note that home office deductions are very clearly defined and subject to specific controls.
posted by rmhsinc at 4:40 PM on July 22, 2012

Keep in mind that only the portion of the house used for rental would be able to (legally) deduct expenses and claim depreciation -- and then if you convert it back to fully owner-occupied at some point or sell it you'd have to give back some of that depreciation.

I would just ask at this juncture what you're trying to accomplish here, and whether this is part of an overall inheritance/transfer planning process. For example, it may be what you really want is a springing trust, perhaps combined with long-term-care insurance, but without knowing your particulars any advice would be fairly useless. You probably need to have a broad discussion here with an elder law attorney before trying to think something up on your own.
posted by dhartung at 6:34 PM on July 22, 2012

Based on my experience I believe the answer is "yes", modulo local ordinances.

Between 1988 and 1996 I co-owned a home in Somerville Massachusetts. The co-owner and I also had at any given time 4 roommates. The roommates paid us rent.

All of this was above board in my taxes. From the perspective of my accountant (and through him the Federal and Massachusetts taxing authorities) the home was 1/3 primary residence and 2/3 rental property. All expenses related to the house (mortgage interest, taxes, homeowners insurance) were split according to that ratio into the two categories. 1/3 of the mortgage interest could be deducted through the homeowners deduction, the other 2/3 could be deducted from the rental income. Similarly, 2/3 of the homeowners insurance, property taxes, landscaping costs, other maintenance and improvements could be deducted from the rental income. The whole house got put on a depreciation schedule &etc. (The added wrinkle - because I was a co-owner, all the numbers were again cut in half, and I got half and the co-owner got the other half.)

This did change the tax effects of selling the house, as it was no longer just a primary residence and I had already depreciated the house, thereby effectively reducing the cost-basis of the property.

All of this said, i never checked with the City of Somerville or the State to see what they thought about my having roommates and charging them rent. So I can't speak to that aspect of the situation.
posted by alms at 7:14 PM on July 22, 2012

Perhaps, but depending on where you live this also may open you to inspections and rental property code requirements you may not currently meet. Your location may or may not also have specific language regarding family members irt qualifying as a rental property
posted by edgeways at 7:09 AM on July 23, 2012

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