Renting Out Basement

Real Estate Agent · Lansing, MI · Member since 2020 · 172 posts · 91 votes

Consider this a hypothetical situation. Say a family member (different last name) was to rent out a room in your basement for $500/month (Market value for similar would be around $700/month). Most people (homeowner) would just keep this off the books and it wouldn’t be a problem. But if someone (homeowner) wanted that $500/month to show up as ‘Income’ to better help them with getting loans for investment properties, what would be the best way to account for the $500/month? Would that be considered rental income and taxed at your regular income tax? Would you need to have an actual lease agreement in place? Should you put that rent money into a new/separate bank account? Would a lender even care about or consider that $500/month as income to better your chance of a loan? Thanks in advance!

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Filipe Pereira

Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes

What would be the best way to account for the $500/month?

Schedule E is how rental income is reported for tax purposes. Check with your CPA to confirm if this works for your scenario.

Would that be considered rental income and taxed at your regular income tax?

Yes, it's rental income. Yes, should be taxed at your regular income tax rate.

Would you need to have an actual lease agreement in place?

No, but your lender will probably ask for one.

Should you put that rent money into a new/separate bank account?

Yes, that would help, but not necessary.

Would a lender even care about or consider that $500/month as income to better your chance of a loan?

Yes, they should

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And as @Theresa Harris mentioned, this opens the door to now being able to take writes offs on the property. Look into tax write offs for owner occupied multi family properties. I imagine it will be pretty similar, but I am not a CPA.

Did I mention I am not a CPA?

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Simon W.Business Member
Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 684 votes
5y
Is the basement a legal unit? Depends on how strict the lender is.
You don't necessarily need a lease agreement in place, but it doesn't hurt and you just have to make sure that the bank statement shows the income of $500.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
5y
Remember if you are renting out part of your house, you can claim some of those expenses. What is taxes is your gross rental income - all of your expenses (property taxes, interest on mortgage, etc). If you are renting out the basement and the square footage is the same as the main floor (ie only two floors in the house), then you'd claim 50% of the property taxes. You will also have other expenses (water, electric, etc) that will be split.
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Troy DeLong
OP
Real Estate Agent · Lansing, MI · Member since 2020 · 172 posts · 91 votes
5y
@Simon W. - The basement is partially finished but would NOT be considered legal for a rental.

@Theresa Harris - I would say the basement area in question would be around 1/4 of the total square footage of the house. So then, say my annual property taxes are $4000, I would be able to write off $1000 of that?
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
5y
Originally posted by @Troy DeLong:
@Theresa Harris - I would say the basement area in question would be around 1/4 of the total square footage of the house. So then, say my annual property taxes are $4000, I would be able to write off $1000 of that?

That is how it works where I am. Check your local laws.

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Filipe Pereira
Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
5y
What would be the best way to account for the $500/month?

Schedule E is how rental income is reported for tax purposes. Check with your CPA to confirm if this works for your scenario.

Would that be considered rental income and taxed at your regular income tax?

Yes, it's rental income. Yes, should be taxed at your regular income tax rate.

Would you need to have an actual lease agreement in place?

No, but your lender will probably ask for one.

Should you put that rent money into a new/separate bank account?

Yes, that would help, but not necessary.

Would a lender even care about or consider that $500/month as income to better your chance of a loan?

Yes, they should

------

And as @Theresa Harris mentioned, this opens the door to now being able to take writes offs on the property. Look into tax write offs for owner occupied multi family properties. I imagine it will be pretty similar, but I am not a CPA.
Did I mention I am not a CPA?
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Chris Kelch
Rental Property Investor · St. Joseph, MI · Member since 2016 · 23 posts · 21 votes
5y
I agree with what’s been said - the way to do it is have a lease in place and track income and expenses by having them flow through a separate bank account. Then have your accountant do bookkeeping and taxes on that bank account. It’s clean and I can’t think of any downsides to doing it this way.
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