Question about owner occupied 4-plex and owner paying rent

7 Replies

Hello All,

I'm still learning the 4plex game but recently purchased a 4plex in Alaska back in March 2016 and moved into my unit in May 2016.  There were already existing tenants and I had to give one the boot to move into the unit.  Currently, I am paying rent like I always have but am curious if my "rent" counts towards the property income. If not, will it hurt me during taxes if I don't pay a month or two of my portion of the rent? For instance, I used part of my 401k for the down payment and it would be nice if I could use a portion of my "rent" to pay down my 401k loan quicker without it hurting me at tax time. 

Since I've not had to do taxes on it yet I'm not really sure how this all works.  When I've tried to research I'm not finding a lot of information. I will probably have a few more questions about how to prepare for tax time and the like so I apologize in advance.  I am also not sure if this is the correct forum. 

Thank you for any and all assistance and information.  If there are pages that would possibly answer these or future questions I'd be happy to read those before I post any further questions.

Leslie J

The rent you "pay" is not considered income.

Your rent can be considered income if the building is owned by a business entity, such as an LLC.

Listen to this short podcast. This CPA/investor was just on a biggerpockets podcast which is how I found him.

https://itunes.apple.com/us/podcast/the-real-estate-cpa-podcast/id1125252777?mt=2&i=370868718

I own a duplex and live on one side so this answer is from my personal experience. First off you should have an accountant and your accountant will deal with this for you. But the unit that you are living in is not considered an investment property because you are owner-occupying it.

You need to keep track of all the expenses for the three units separate from your unit. I use Quicken for my personal bookkeeping.

Your investment part of the fourplex will be reported on Schedule E of your personal tax return unless you have a C-Corp (which I doubt you'd be asking this question if you did). You can deduct all expenses on the investment side from your taxes (repairs, utilities, capital expenditures, 3/4 of the depreciation, 3/4 of the insurance, 3/4 of the property tax, 3/4 of the interest on your mortgage, etc.) You only count the income that your tenants are paying you against that.

You'll then have your personal residence which is reported on a different part of your tax return. Here you don't have income to report (because you'd just be paying yourself and then being taxed on it) and you can only deduct a couple of the expenses like 1/4 of the property tax and 1/4 of the mortgage interest.

My main recommendation is to go get an accountant at least for the first year so that you don't make mistakes on your tax return.

Keep in mind when you sell that 1/4 of the property will be able to take advantage of the tax free gains for an owner-occupied if you've lived in it for two of the last five years. The other 3/4 will be taxed unless you use a 1031 exchange.

Last thing if your units are not all the same square footage than your calculation of how you divide your expenses between your personal residence and your investment portion could be more complicated then just 1/4 and 3/4.

Hope this helps!

Originally posted by @Wade Williams :

Your rent can be considered income if the building is owned by a business entity, such as an LLC.

 This is not true.  You can't convert personal expenses into business expenses in this way at all.  This would never pass through any kind of audit and an IRS agent may consider this fraud as it essentially attempts to take personal expenses (such as for personal use of utilities, depreciation, repairs, etc) and make them rental deductions.

Don't do this.

@Linda Weygant Our CPA assured us if the unit is used as an home office/model unit and market rent is paid for business purposes, it can be deductible. This could also be a considered a on-site manager unit for which you could pay yourself through the entity a fair market wage (rent) or pay the entity to have on-site leasing office. Linda, I would be interested in speaking more if there is flaws in this. Please message me if there are better options for such scenarios!

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