Should this be a rental for tax purposes?
April 14, 2013 3:33 PM Subscribe
I live in a co-op in New York City. My spouse and I 'own' the unit, but we have a friend who lives with us. The unit is owner-occupancy only, so when we bought, we got special permission from the board for this one person to live with us. Owners are not allowed to rent out their units (but our situation is understood). Our roommate helps us pay the bills by giving us some money each month. There are no leases, subletting, proprietary lease for the coop, or any formal documentation at all.
Is the money that he gives us each month "rental income"? I would prefer not to separate out rental income, expenses, etc. in addition to our legitimate home offices. However, I care more about doing this properly and not harming a) the roommate, b) the co-op, or c) my bottom line.
Some other factors: 1) We have a maintenance cost that goes to the co-op and a mortgage, both larger than the roommate's payment. 2)I don't want the roommate to get in trouble by reporting rental expenses that aren't then reported as income by someone -- but it's quite the expense for them, so if I could get them in trouble, I'll deal. 3) Two of us have legit home offices. Most "rental income" rules pertain to partial year time-shares; renting out a room is geometrically more complicated when trying to parcel out the space between both rental and home office. 4) When we all lived together in a rental, it was totally rent money the roommate gave; now ... nothing *can* be rented, so I don't know how to report it. 5) I don't know whether the coop could get in trouble since it "doesn't rent" - and I have never considered whether that money goes to the maintenance or the mortgage.
Some other factors: 1) We have a maintenance cost that goes to the co-op and a mortgage, both larger than the roommate's payment. 2)I don't want the roommate to get in trouble by reporting rental expenses that aren't then reported as income by someone -- but it's quite the expense for them, so if I could get them in trouble, I'll deal. 3) Two of us have legit home offices. Most "rental income" rules pertain to partial year time-shares; renting out a room is geometrically more complicated when trying to parcel out the space between both rental and home office. 4) When we all lived together in a rental, it was totally rent money the roommate gave; now ... nothing *can* be rented, so I don't know how to report it. 5) I don't know whether the coop could get in trouble since it "doesn't rent" - and I have never considered whether that money goes to the maintenance or the mortgage.
Best answer: IANYL, and IANA(tax)L in any case, but the basic rule is that if you're getting money, and it's not a gift or inheritance, it almost always needs to be counted as income somewhere. Rental income, business income, something.
According to the IRS, Rental income is any payment you receive for the use or occupation of property." So yeah, that sounds like rental income to me. The IRS routinely privileges function over form and does not give a fig about the regulations imposed by your co-op.
Still, exactly where and how this income should be reported is a question that can only be answered by a qualified professional in your jurisdiction. Rental income is a notoriously complex affair, and you may be able to deduct things that you wouldn't otherwise be able to deduct. There are even provisions for divided use of a single "dwelling unit," which seems to be what you've got going on here. Get thee to an accountant.
posted by valkyryn at 4:04 PM on April 14, 2013
According to the IRS, Rental income is any payment you receive for the use or occupation of property." So yeah, that sounds like rental income to me. The IRS routinely privileges function over form and does not give a fig about the regulations imposed by your co-op.
Still, exactly where and how this income should be reported is a question that can only be answered by a qualified professional in your jurisdiction. Rental income is a notoriously complex affair, and you may be able to deduct things that you wouldn't otherwise be able to deduct. There are even provisions for divided use of a single "dwelling unit," which seems to be what you've got going on here. Get thee to an accountant.
posted by valkyryn at 4:04 PM on April 14, 2013
There are no leases, subletting, proprietary lease for the coop, or any formal documentation at all.
There is no paperwork on this arrangement right now, anywhere. Why would you create some?
posted by Kadin2048 at 4:11 PM on April 14, 2013 [1 favorite]
There is no paperwork on this arrangement right now, anywhere. Why would you create some?
posted by Kadin2048 at 4:11 PM on April 14, 2013 [1 favorite]
I had the exact same problem as you recently, only i was the friend, not the owner-- I live in a co-op owned by someone else that is not supposed to be rented or subletted.
I did not want the homeowners to get audited if I claimed rent paid if they did not claim rental income. So I simply asked how they handled it on their taxes. Proceed accordingly. YMMV.
However, the home office thing makes it even trickier. Please consult an accountant on that.
posted by lovelygirl at 5:15 PM on April 14, 2013
I did not want the homeowners to get audited if I claimed rent paid if they did not claim rental income. So I simply asked how they handled it on their taxes. Proceed accordingly. YMMV.
However, the home office thing makes it even trickier. Please consult an accountant on that.
posted by lovelygirl at 5:15 PM on April 14, 2013
All I can tell you is what I did when I had a roommate. Which was, nothing. The way I viewed it was that I was not profiting off the arrangement, they were merely reimbursing me for costs incurred on my behalf. I don't know if this is correct or not, but knock on wood, I haven't heard anything.
But you do have to be very careful about the home office deduction. The rules are pretty strict and this is where people tend to get audited.
IANYL, and IANA(tax)L in any case, but the basic rule is that if you're getting money, and it's not a gift or inheritance, it almost always needs to be counted as income somewhere. Rental income, business income, something.
Don't forget reimbursements. If someone eats all my Cheerios and gives me the price of a box of Cheerios, that's not income. I don't have more than I did before, I merely got paid back for a "loss". When I use my car for work and my employer reimburses me for fuel, that's not income because I already bought the fuel, and they are just paying me back for the portion that they used. (However, reimbursements above the actual cost DO have to be reported as income. I don't exactly know how though.)
posted by gjc at 6:10 PM on April 14, 2013 [1 favorite]
But you do have to be very careful about the home office deduction. The rules are pretty strict and this is where people tend to get audited.
IANYL, and IANA(tax)L in any case, but the basic rule is that if you're getting money, and it's not a gift or inheritance, it almost always needs to be counted as income somewhere. Rental income, business income, something.
Don't forget reimbursements. If someone eats all my Cheerios and gives me the price of a box of Cheerios, that's not income. I don't have more than I did before, I merely got paid back for a "loss". When I use my car for work and my employer reimburses me for fuel, that's not income because I already bought the fuel, and they are just paying me back for the portion that they used. (However, reimbursements above the actual cost DO have to be reported as income. I don't exactly know how though.)
posted by gjc at 6:10 PM on April 14, 2013 [1 favorite]
Best answer: You can look at the relevant IRS publication on rental income (I don't remember the number, but it's not hard to find on irs.gov). A key factor is whether you're charging a fair market rental, or whether your rent (however it's received) is below market rate. In the first case, there are a bunch of tax rules that apply. In the latter case, you still have to report the income, but it's far less onerous. I'm not a tax professional, and this is not tax advice. Basically, my reading of the rules is that if you're trying to make money off of rental, you need to be meticulous; if you're just renting as a hobby, or to offset only part of your expenses, the rules are laxer.
posted by brianogilvie at 6:28 PM on April 14, 2013
posted by brianogilvie at 6:28 PM on April 14, 2013
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posted by dfriedman at 3:56 PM on April 14, 2013 [1 favorite]