From: rpitts@cerl.gatech.edu (Richard Pitts)
Newsgroups: misc.taxes
Subject: Re: rental income agony
Date: 26 Jan 93 18:56:47 GMT
Organization: Georgia Tech CERL/EE, Atlanta, Ga

In article <1k3unjINNatu@emory.mathcs.emory.edu> kss@mathcs.emory.edu writes:
|In article 18359@magnus.acs.ohio-state.edu, JONESD@kcgl1.eng.ohio-state.edu (David Jones) writes:
|> I am one of 1992's record number of single, first-time home buyers.  The
|> friend I was sharing an apartment with was left in the lurch so I agreed
|> to let him live in my house in return for paying half the mortgage and expenses.
|> My friend is obviously paying me rent, but how do I report this to the IRS?

Practically all rental income is to be reported.  The exception is that 
if you only rent out something for something like less than 14 days a year.
Check IRS Publication 17 or get the specific guide to renting.

Schedule E is used for rental income and expenses.  Another form 4560, I 
think, is for depreciation.  One has to decide what portion of the property
is used for personal use and what is rented.  I think, one can divide it
among the number of people (me and two renters) or by floor space used
(square footage percentages).  I choose the latter and said that 50% of
my house was used for rental purposes, whereas, I could've pretty
easily said 66%.  [I considered they had smaller bed rooms, used
half of the garage, and had equal rights to the common living space.]

You can deduct the above determined portion of insurance, utilities
that you pay, general repairs, interest, taxes, etc.
[the remainder of taxes and interest will be deducted on Schedule A,
as your expenses.]

Additionally, you can depreciate your property by the above determined
percentage.  This is a nearly 3.5% per year, I think, and this is pro-rated
during the time the property was considered available for rent.  The
catch on depreciation is that when you sell your house, you have to
recover the amount depreciated by adjusting your basis.  Note on 
depreciation one has to make a distinction between the property value
and the land value.  You can't depreciate land.

One can take a loss of upto $25,000 or so per year, if you are actively
involved in the rental process and most people are.  Exceptions could
be if you have a manager or firm to buffer you from the transactions.

The deductions on Schedule E (apart from the depreciation) wipe out
the rental income, plus you get to depreciate another significant
amount and so take a loss.  I considered fair market value to be
approximately the same portion of my mortgage plus any unreimbursed utilities
that I paid (again 50%).  
 
|> Trying to apply the various rules in IRS publications is extremely agravating.
|> Their model of a rental arrangement is that at each point in time a property
|> or cleanly divisble portion thereof is in a state "rental" or a state of
|> "personal use".  In my case, everything except the bedrooms has communal use.
|> 
|> What seems fair to me is to treat his share of the mortgage payment as my
|> net income, folding the interest and taxes into the itemized deductions
|> on schedule A.  There is a rule about how the base rate for the first phone
|> line is not a deductible expense, so it would have to be added.  Is this
|> acceptable to the IRS?  What about the cable TV bill?  What about depreciation?
|> What about the little box on schedule E: "Did you use the property for personal
|> purposes..."?  Arrgh!
|
|We shared our house with friends for a year; they didn't pay anything toward
|rent, just split utilities, but my reading was that if they HAD paid anything,
|it wouldn't have been reportable as rental income.  The documents said if part
|of the dwelling was used for personal use (as opposed to rented), then the entire
|dwelling counted as personal during that time.  There was also a clause about
|'fair market value'; ie, if they paid less than a 'fair market value' for their
|part then it would not have counted as rent either.

If you had have recieved payments, I would disagree on this.  For one should 
and can divide up the usage of the property between what is used for personal 
and rental purposes.  Utility expenses would wipeout the payments you
recieved for them.  I'd have to check into this "fair market vaule" thing.
It may have to do with the purpose for "renting" whether it was to make a 
profit or not.  If not, ones losses may be limited.  Businesses have to show a
profit in 2 or 3 out of 5 years in order to be declared as a business,
else they are considered as a hobby and your losses are limited to the
amount of your income from the business.

Sincerely,
Richard Pitts

Sincerely,
Richard Pitts

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