Marketwatch.com had an interesting article on tax implications from the income generated from a rental property as well as income generated from renting out rooms. The article mentioned receiving a “healthy tax deduction” even if you generated a loss, where the rental income didn’t cover the entire yearly expenses. This was the case with Linda, a fellow “live-in landlord.” Though, there is a limit to how much of a deduction you can receive if you generated loss. This makes sense because you don’t want a high income earner, stating a loss on a rental property just to receive a greater deduction on his tax liability.
Another benefit of renting out part of the house, i.e. the rooms is the ability to reduce the Alternative Minimum Tax(AMT) by moving your property tax and mortgage interest to your Schedule E, the Supplemental Income and Loss form, generally used by Landlords.
Now, this part of the article had me wondering a bit:
“The depreciation you take will be based on the lower of your tax basis or the fair market value when your start to rent out the house. Your tax basis is your purchase price plus purchase fees, cost of improvements, refinancing fees, less any deducted casualty losses.”
What happens if you’re living with your Significant Other and you’re paying him or her a fixed monthly rent? Remember, you’re living together – you’re not married nor engaged. Technically, the person receiving the income should report it, but I’m willing to bet that may not always be the case. The laws on this matter will probably vary from state to state, which is why I highly recommend consulting a tax professional to prepare your tax return or at least consult them. The advice you receive and knowing you did everything correctly is money well spent.