What are the tax conciquences of house hacking?
Hello,
I've been reading a lot about the taxes involved with house hacking a SFH, but the main thing I can't figure out is what is normal/expected by the IRS for calculating the percentage of the house that shared expenses (like mortgage interest) can be deducted for to see if house hacking would be a net positive for me or not, since I've seen wildly conflicting amounts in different posts. So far this is what I've got, any additional information or corrections would be much appreciated.
Pub 527 says:
"You can use any reasonable method for dividing the expense"
But the examples it gives are all for cases where the tenant and owner have 100% separate spaces, there's no clear statement in the Publication on how to treat shared rooms as far as I can tell, but most of the examples I've seen online seem to be counting shared spaces as 100% deductible.
For example, if the owner is the sole user of 30% of the space, 40% is shared, and 30% is the tenants personal space; would shared expenses be 30%, 50%, or 70% deductible?
This other quote I found in Pub 527 seems to point to shared spaces counting as fully deductible if your paying for additional liability insurance on them related to them being an area the tenant can use:
"[I]f you paint a room that you rent or pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense"
Other info I've found that I'm fairly certain is correct. Mostly posting for anybody who finds this in the future, but also please correct me if any of it is wrong:
Repairs/expenses
- If done in your part, deduct nothing
- If done in shared part, deduct shared %
- If done in rented part, deduct full amount
- Even improvements can be deducted that year vs capitalized IF each item or invoice is $2500 or less, which is very important when selling
Mortgage interest, insurance, utilities gets split between rental and personal deductions. Very useful for anyone at or below the itemization vs standard deduction threshold for personal taxes
When selling the house (unless you do a 1031 exchange on the investment part)
- pay back depreciation recapture tax at the ordinary income rate
- pay capitol gains tax on the deductible percent of the profits
- Ignore both of the above 2 bullet points if the house was 100% owner occupied/primary residence for at least 2 of the last 5 years
References that I got this from for anybody looking for this info in the future
https://www.irs.gov/publicatio...
https://www.biggerpockets.com/...
https://www.irs.gov/businesses...