Rent by the room to family

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Rent by the room to family

Kevin Galimba
Rental Property Investor · Jacksonville, FL · Member since 2021 · 5 posts · 2 votes

Hi team,

I recently closed on a 4 bed single family property in Jacksonville. My plan is to live in it for a year and buy another property afterwards. For the meantime, I'm planning to rent out the three rooms to my dad and two brothers.

What do I need to know in terms of the lease agreement and taxes that I need to declare?

Also will the lender for my second house hack consider that as a 1 year experience of managing a rental property?

Thanks,

Kevin

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  • A.J. D'Asaro
    Investor · Chicago, IL · Member since 2016 · 49 posts · 46 votes
    4y

    1. Get a standard lease & assign a number to each of the rental rooms in your house, and add that room number to each individual lease. Also add this:  "This lease is for use of a single room only, personal items left in the common areas can be removed at the discretion of the landlord with 1 day notice to the tenant. Tenant agrees to keep common areas clean, do their dishes within 8 hours, keep noise to a minimum from 10pm-8am on weeknights, respect the right of other roommates to enjoy the house, and resolve any disputes with other roommates in good faith."

    2. I do not understand "taxes that I need to declare". I think what you mean is, do you need to pay taxes on the rental income from your family members. The answer is yes, you need to report all the income on Schedule E, if you want the bank to give you credit for that income next year when you go to buy property #2. However, there are tax benefits as well that come with owning real estate - your rental income should end up being tax free after taking all the deductions you are entitled to. With 3 tenants, you should be able to deduct 75% of everything you spend on the house - your mortgage interest, property tax, insurance, repairs, and the big Depreciation - you should either get a real estate CPA to do this for you, or buy and read "Every Landlord's Tax Deduction Guide" multiple times until you understand it.

    3. Yes. But you just bought your first property - focus on getting that cash flow before you start thinking about property #2.

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  • Kevin Galimba
    OP
    Rental Property Investor · Jacksonville, FL · Member since 2021 · 5 posts · 2 votes
    4y

    @A.J. D'Asaro thank you so much AJ. This has been really helpful!

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y

    @Kevin Galimba

    All moves shouldn't be meditated by tax incentives. 
    However, you may want to see if it is worth it to stay in the house for 2 years to take advantage of section 121 exclusion.

    You will have a better sense of the house appreciation after living in the house for 1 year.
    Ex. If the house appreciates by $100,000 after 1 year, then staying 2 years is more incentivized.
    If the house does not appreciate much after 1 year, then it may not make much more sense to stay longer.

    Best of luck.

    [email protected]917-280-8544
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  • A.J. D'Asaro
    Investor · Chicago, IL · Member since 2016 · 49 posts · 46 votes
    4y

    @Basit Siddiqi Great point... section 121 is a great benefit in the right circumstance. Actually I am using this strategy now. I have an Airbnb bought during the pandemic that has appreciated 25% in 1 year. Last year I reported my Airbnb income on Schedule C & did not take property deductions in order to retain the homeowner capital gains tax exclusion. 

    I would say it's unlikely this would come into play for @Kevin Galimba... since you can HELOC out your invested capital and buy your next property, while retaining the cash flow and future appreciation of the current property. You would need either an emotional reason to sell (like me- I decided I don't have time to be running Airbnbs), or you have a strong negative view of your market and want to cash out, or you would need to be in a market with very low cash flow (where you would eventually hit your Debt to Income limit, capping the amount of total real estate debt you can have).

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  • Ken Dunn
    Member since 2019 · 36 posts · 36 votes
    4y

    I would think long and hard before renting to any friends or family.

    If it came down to it, would you actually evict your Dad or brothers?

    Neither would I….and that is exactly the reason I would never rent to a friend nor a family member.

    You are running a business. Keep it separate from your personal life.

    Hope this helps,

    Ken

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y
    Originally posted by @A.J. D'Asaro:

    @Basit Siddiqi Great point... section 121 is a great benefit in the right circumstance. Actually I am using this strategy now. I have an Airbnb bought during the pandemic that has appreciated 25% in 1 year. Last year I reported my Airbnb income on Schedule C & did not take property deductions in order to retain the homeowner capital gains tax exclusion. 

    You are doing things incorrectly.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
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  • A.J. D'Asaro
    Investor · Chicago, IL · Member since 2016 · 49 posts · 46 votes
    4y

    @Basit Siddiqi Care to elaborate?

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