TaxMe Questions
April 4, 2008 7:55 AM   Subscribe

Questions about handling income from housemates and home office deductions.

I've had housemates since I bought my house ten years ago. This has been an informal relationship, with no lease or written agreement. I've never declared this income, considering it more in the line of friends sharing living expenses than a rental business per se.

Now I have an accountant for the first time, who is recommending that I start declaring this income. I'm trying to figure out what to do, but I'm confused by what I've heard and read.

What are the downstream implications of treating one's home as a source of rental income, both in the current tax year and when I sell? On the other hand, what are the risks associated with not declaring this income? If you or someone you know is in this situation, how do you handle it on your taxes?

An additional question on the home office deduction. If the square footage of my office is only 10% of the area of my house, is it still worth it to take the deduction? Is there any downside to doing so, such as post-sale consequences? My mom says taking the home office deduction puts you more at risk for being audited. How true is that?

Thanks for your patient explanations, Mefites.
posted by ottereroticist to Work & Money (2 answers total)
I am an accountant, but not yours.

The IRS wants you to report all amounts received as rent. If you are renting it for a profit you can deduct all expenses and may incur a loss. If you are not renting for profit you can deduct expenses up to your rental income.

In my opinion, if taking the home office deduction will save you $1 in taxes, it is worth it. However, when you sell you will have to recapture the depreciation deducted.

The more forms you file, the more the IRS has to look at and you have a higher chance of being audited. However, the odds are still small. If you can document your income/expenses you have nothing to worry about.
posted by itsamonkeytree at 9:49 AM on April 4, 2008

I rented out part of my previous house. In addition to reporting the rent as income, I depreciated the rental portion of the house. This gave me a nice break on my taxes. However, it requires you to separately track many house expenses. For example, I rented out the 2d and 3rd floors of my house. Therefore, 2/3 of the cost of repainting the exterior was a business expense of some sort (can't remember the exact category). If I remember right, I also separately tracked the basis (amt of money put into the house), because when I sold it, 2/3 of the sale was considered the sale of business property, which had different tax implications.

This was awhile ago, but I remember that it did help with taxes while I was living in the house, which was when money was tightest for me. I don't remember if the business property aspect of it was a good or bad thing when I actually sold the house.

Also, being above-board as a landlord means your renters can apply for renters' credit, if your state has that, without risk to you.

Re the home office: You must use the home office exclusively for business. Most of us do personal surfing as well as business in our home offices and so can't use the deduction. I work 100% at home but don't use the deduction because personal and private uses overlap too much.

Here's what the (very useful) Nolo book "Deduct It" says:
You are entitled to the home office deduction if you:
  • are in business
  • use your home office exclusively for business (unless you store inventory or run a day care center), and
  • use your home office for business on a regular basis.
posted by PatoPata at 2:11 PM on April 4, 2008

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