Half family occupied, half rental

[Dhruva Patel]

Hey experts,

I recently bought a condo under my name and created an LLC. The condo is under my name but the LLC was created because I planned on renting out half of the space. My brother will be living in the other half and I do not want to charge him rent. I'm trying to figure out the tax implications. Can I show rental income for the half that is being rented out and take half the deductions for all expenses? How should I pay for most expenses? From personal account or LLC account? How would the IRS know that just half of it is rental from the return? Any advise is appreciated.

Thanks!

[Ashish Acharya]

@Dhruva Patel, Congrats on the Condo. Are you saying that you are letting your brother live for free, but want to claim the rental income?  I do not know if I am understanding your question. 

If he is not paying you a rent than there is no rental income and there is deduction for the expenses. The expenses you take deduction should be matched with the income. If there is no income, there is no expense. 

If you plan to collect rent, than you can worry about the tax implication. 

[Dhruva Patel]

Hey Ashish, thank you :)

It's a 2 bedroom place. My brother will occupy 1 room rent free and I will have rental income from the 2nd room. Hope that clarifies the question. 

[Nicholas W.]

Honestly, you need to talk to a CPA to make sure you get this right. If you track all the expenses incorrectly based on a forum post your tax prep could cost significantly more than doing a consultation up front.

[Ashish Acharya]

Originally posted by @Dhruva Patel:

Hey Ashish, thank you :)

It's a 2 bedroom place. My brother will occupy 1 room rent free and I will have rental income from the 2nd room. Hope that clarifies the question. 

Oh! actually your original post was clear on that, I was assuming that you were trying to house hack. Sorry for that. 

There is a rule for property used for the personal purpose and is considered home ( I have described below how your house qualifies as as home or). 

First step for you is to first determine if the rental property is considered home.

Rules to determine if the rental unit is considered home. If you use unit for the personal purpose more than the greater of:

1)14 days or

2) 10% of the today days it rented to other at fair market value.

You might be thinking this does not apply to you, but, per IRS,  your brother living in the house counts as a personal use of the house unless he is paying you the fair rental price and the unit he is living is considered his home. 

"What is a day of personal use? A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons: A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.)."

Since you meet the criteria for rental unit considered as home, there are two scenarios:

1) Home rented for less than 15 days: Do not report any income or expense. The mortgage interest, property taxes, and any qualified casualty loss will be reported in Schedule A as itemized deduction.

2) Home rented for more than 15 days: 

a)Income: Report all the rental income from your second renter

b) Expense: the expenses must be divided between rental use and personal use. The deductible rental expenses cannot be more than gross rental income, although the losses can be carried forwarded.. The expenses is divided

i) Based on the number of days of the personal use and rental use and

ii) Based on the portion of the house that is rental vs  personal use of the house. Hope that helps.

Please consult CPA :) This is just for information purpose. 

[Dave Toelkes]

@Dhruva Patel

IMHO, half of the property is your second home regardless of whether you are living there or your brother lives there rent free.   The other half is a rental that you will manage.  Treat the condo for tax purposes as two separate properties: a second home and a rental property.  Divide all common expenses fairly between the rental and the second home. Some second home expenses are Schedule A deductions if you itemize, such as home mortgage interest and property taxes.  Your second home portion of the Condo association fees are a non-deductible personal expense while the rental half of the condo fees are a Schedule E expense, as are the rental portion of all other common expenses.  Only half the cost of the dwelling structure (excluding cost of land) is used as your depreciation basis for the rental half of the property.  Any expenses directly and exclusively for the rental portion of the property can be deducted in full against rental income on Schedule E. 

With an LLC, it is good practice to maintain a separate checking account for the rental activity, though commingling business and personal funds is not an issue if your LLC is a single member disregarded entity and you are managing the property yourself.

Consult your CPA for more specific guidance for your unique circumstances.

[Dhruva Patel]

@Dave Toelkes Thank you for the detailed response! :)

[Wilson L.]

I believe you would need to transfer the title to the LLC if you want asset protection. Having an LLC by itself will not do much for asset protection on a house rental that is still in your name.

[Dhruva Patel]

@Wilson L. Thank you for that note. I will work on that.