Primary Residence: Portion Used as Rental Questions

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Randy Rodenhouse
Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes
2y

Is it a single family house and just renting a bedroom? Why do you want to have your property treated as an investment property? Your primary residence you get to deduct the interest and taxes but not the insurance. If it is an investment property, you can deduct taxes, insurance and expenses for maintenance, etc.  However, when you rent out a portion of your home, you need to make sure you're properly dividing any expenses you pay to maintain the home between personal and rental uses. So not sure saving that much in taxes when all said and done.   The IRS imposes a 20% penalty for inaccuracy when a taxpayer significantly overstates expenses. 

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  • Randy Rodenhouse
    Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes
    2y

    Is it a single family house and just renting a bedroom? Why do you want to have your property treated as an investment property? Your primary residence you get to deduct the interest and taxes but not the insurance. If it is an investment property, you can deduct taxes, insurance and expenses for maintenance, etc.  However, when you rent out a portion of your home, you need to make sure you're properly dividing any expenses you pay to maintain the home between personal and rental uses. So not sure saving that much in taxes when all said and done.   The IRS imposes a 20% penalty for inaccuracy when a taxpayer significantly overstates expenses. 

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  • Charles Perkins
    Member since 2024 · 222 posts · 161 votes
    2y

    There can be benefits in renting out a portion of your primary residence. I personally created a legally created ADU or mother in law unit. All expenses directly incurred for the ADU are 100% allocable to the rental unit. A reasonable basis is required for allocating land and building.

    Every investor needs to examine their own personal tax situation to determine if it makes sense.  There are added headaches because the property is shared to consider as well.  Financially it may make sense as well.  One just has to weigh all the pros and cons for your own situation.

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  • Dee Jesse
    OP
    Member since 2024 · 3 posts · 1 vote
    2y

    Thank you Randy and Charles.  Randy, it is a single family and I would be renting 1 bedroom and the only other full bath as well as the common areas of the home.   The other bedroom would be used by both of us for storage/closet space, etc.  So, I was thinking allocating 50% of related expenses and that by treating as investment property I could actually get some tax benefits of doing needed renovations.   Just not sure whether (and what if so) there are any impacts to the mortgage/insurance company I need to be aware of, etc....

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  • Charles Perkins
    Member since 2024 · 222 posts · 161 votes
    2y
    Quote from @Dee Jesse:

    Thank you Randy and Charles.  Randy, it is a single family and I would be renting 1 bedroom and the only other full bath as well as the common areas of the home.   The other bedroom would be used by both of us for storage/closet space, etc.  So, I was thinking allocating 50% of related expenses and that by treating as investment property I could actually get some tax benefits of doing needed renovations.   Just not sure whether (and what if so) there are any impacts to the mortgage/insurance company I need to be aware of, etc....


    Allocation is generally done based on sf.  Shared or common space is more tricky but a 50/50 split may be appropriate.  Document everything for yourself, IRS and tax preparer.  It would be a good idea to review your specific situation with a CPA experienced in real estate investing.

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  • Dee Jesse
    OP
    Member since 2024 · 3 posts · 1 vote
    2y

    Thanks Charles - so are you aware of any impacts to mortgage/insurance co?  Either way, I will call but wanted to see if anyone here had any knowledge....

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  • Charles Perkins
    Member since 2024 · 222 posts · 161 votes
    2y
    Quote from @Dee Jesse:

    Thanks Charles - so are you aware of any impacts to mortgage/insurance co?  Either way, I will call but wanted to see if anyone here had any knowledge....

    It will likely increase your insurance rate because of the business activity/liability.
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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    It looks like you will be doing a house-hack.

    It is normally not required to inform the lender.

    The rents received will be considered rental income and have to be reported on your tax return.

    [email protected]917-280-8544
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