Single Family Home House-Hack Tax Issue

2 Replies

Hello All,

I am experiencing an interesting problem…

I am a new real estate investor in PHX, AZ. I bought my first property a month ago, a 3x2 SFH, with a 5% down owner occupant conventional loan. I just signed 2 tenants on to a 12 month lease to live with me in this home. That monthly income is covering about 80% of the cost of principal, interest, tax, insurance (PITI), but I've still had a load of costs like repairing sewer lines and HVAC. I spoke with an accountant and he said I will be taxed on this rental income as ordinary income because i am collecting the money under my name and not a business entity so I cannot make any deductions or write offs. Overall, i did not make a profit, but I will be still taxed on this rental revenue at my marginal tax rate? Sounds broken to me.

I thought about transferring this property to an LLC, but I read that there becomes problems when transferring an owner occupant property to an LLC.

Any insight or advice would be appreciated! Trying to keep my money out of Uncle Sam’s pockets the best that I can!


@Andrew Clark I can't speak to whether the accountant was "right" or not because I don't know what detailed information you provided him with.  If you asked him "will rental income be taxed?" the answer to that is yes, but only net income, as you correctly pointed out.

Have you done a work-up yourself of what expenses you think offset the rental income?  For example, mortgage principal is not an expense.  But depreciation is.

As always.... need more info =)

For a house hack, I've read that it doesn't make much sense to have it under an LLC. One of main benefits of Owner Occupied is the exclusion of capital gains taxes after 2 years of living there. Would factor that benefit in to your analysis. But I also house hack and spoke with my CPA, my understanding was same as above, that net income is taxed, so figure out what your rental income minus qualified expenses are. Best to have a more detailed discussion with your accountant and share with them all your income/expenses if you track them in a spreadsheet or somewhere.