Today TaxMama hears from Shawn in North Dakota who is worried: “I just purchased a home as my primary residence. Several people live in this home and pay a monthly amount to help cover the mortgage. Am I required to report this as rental income even though this is my primary residence? I believe if the property is rental, then at the time of sale half of the profits are taxable. Is there any way to avoid this?”
First of all, congratulations on finding people to share the costs with you with whom you can bear to live.
You bet you’ve got to pick up the money as rental income!
But you’re not alone doing this. So I’ve created a whole, separate site that already answers questions like this – http://rentaltaxes.com/
Here are the basic rules for a mixed-use home (rental and home):
The third item applies to you:
If you used your home for business, or rented out any part of it during the time you owned it, even though you may not have to pay any capital gains taxes, you will have to pay tax on the depreciation of the business part of the usage. So, you see, you don’t have to worry about paying taxes on half the gain. You’ll just pay taxes on the small amount of depreciation you take over the next several years.
There’s more information for your here, just read the rules for mixed-use property.
And if you really want to do some reading….there are the IRS publications. Don’t dismiss them. There are some good examples. http://rentaltaxes.com/forms.html
Incidentally, if you sit down with a good tax professional who understands the nuances of dealing with roommates, you may just find ways to keep your taxes low and your cash-flow high!
And remember, you can find answers to all kinds of questions about renting out part of your home, and other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
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