Owner occupied multifamily?

Question

Okay, here's the scenario.  Just bought a 4 unit multifamily property (one tax parcel with 3 buildings).    It's got a 2 bedroom unit, a 1 bedroom unit, and a duplex.  My son (in college) will be living in the 2 bedroom for the next 2 years with a roommate. The roommate is paying rent.   The 1 bedroom is rented and the duplex is fully rented.

1) Does my son living there make it be considered "Owner occupied" for tax purposes? Does it make a difference, if I charge him rent?

2) If this is considered "owner occupied", and I have to do the portion-of-the-whole accounting (approx 20% of the total property would not be deductible), what happens in 2 years when my son moves out, and I fully rent out the 2 bedroom unit?  Obviously, expenses are fully deductible, but what happens with depreciation?  If I'm calculating depreciation, then only claiming 80% for the first 2 years, after that I'd start deducting the full amount, but in 27.5 yrs, I'd still have leftover basis of 20% of the first 2 years depreciation, right?  Is that even a problem?  I guess maybe that's always the case, because if 10 years into owning a property, I put a new roof on, that's depreciated over the next 27.5 years from the date installed.

Assuming I'm correct about #2, then my only question is #1.  Is a family member occupied room considered owner-occupied?  My guess is "yes".

Brandon Hall · Answer

@Jack Forester unless your son is on title, it's viewed as you simply providing a place for a relative family member to live. This means it's personal use property which is basically a horrible tax situation to be in.

My suggestion is to charge your son some amount of rent (technically needs to be fair market value) that way you can qualify the entire property as a rental property.

Jack Forester · Answer

Perfect, thanks!

Brandon Hall · Answer

You can have two leases. It's common practice with student rentals to rent by the room.

Jack Forester · Answer

Thanks, @Brandon Hall, that's what I was thinking I might have to do.  Can I have 2 lease agreements for the 2 bedroom house, or do I need to combine them and put the 2 housemates on the same lease?   My thought about having separate lease agreements (Bedroom A, plus use of common areas, and Bedroom B, plus use of common areas) was to prevent my son from being liable for his housemate's rent.  I know normally that is the reason for a single lease, but in this case that would be counter-productive.

Jack Forester · Answer

And should I track these 3 buildings as separate properties, so that expenses related to the 1 bedroom unit and the duplex are fully deductible?  To me this makes sense to do, albeit more complicated accounting.