Renting my Owner occupied home while i live in the In-Law
Oakland, CA · Member since 2017 · 6 posts · 3 votes
Renting my Owner occupied home while i live in the In-Law
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I think for the loan purposes you should be ok. The one long term ramification of this that I know of is that if you ever want to claim the $250k (for singles) or $500k (for couples) deduction on capital gains when selling your primary residence, this effects that calculation. I believe the rule is that you can deduct a proportional amount to what you use as primary residence and for proportionate number of years. The popular misconception is that if you stay in your primary residence again for 2-3 years you can claim the full amount but as per my accountant, that is not true. The impact of ever having rented your home stays with you forever, you can dilute the percentage by making your own stay longer but it will never go back to zero. Also, when you report the rental income on your taxes, that portion of the house is considered investment income, so technically you can take depreciation on it. However, if you do and you want to then declare it as a primary residence for sale purposes, you have to report all that depreciation as income. Depending on your long term goals with the property, report your income carefully.
7 Replies
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes9y
I would assume that it wouldn't really be any different than if you were staying in the main house and renting out rooms to others. Yes, any money someone else paid you would be considered income. I would definitely not consider expensing repairs and not claiming the rental income, because you would probably be committing tax fraud.
Look at your paperwork - does it say that you have to physically reside in the house, or on the property?
Skyline Properties - Oakland, CA · Member since 2017 · 6 posts · 3 votes9y
My applications reads;
“I, the Borrower or Co-Borrower will occupy the property within 60 days of signing the security instrument, and intend to continue to occupy for at least one year;”
My Wells Fargo Mortgage consultant and I interpret living in the in-law unit as occupying the property. I’m hoping I am in the right here….. unless someone knows something different.
i do intend on claiming the rent as income and would want to add all my expenses i am doing to get the main house ready for rental. I do want to look for my second investment in one year, so i would like to show the extra income from rent on my taxes to help my with my DTI in a year.
I think for the loan purposes you should be ok. The one long term ramification of this that I know of is that if you ever want to claim the $250k (for singles) or $500k (for couples) deduction on capital gains when selling your primary residence, this effects that calculation. I believe the rule is that you can deduct a proportional amount to what you use as primary residence and for proportionate number of years. The popular misconception is that if you stay in your primary residence again for 2-3 years you can claim the full amount but as per my accountant, that is not true. The impact of ever having rented your home stays with you forever, you can dilute the percentage by making your own stay longer but it will never go back to zero. Also, when you report the rental income on your taxes, that portion of the house is considered investment income, so technically you can take depreciation on it. However, if you do and you want to then declare it as a primary residence for sale purposes, you have to report all that depreciation as income. Depending on your long term goals with the property, report your income carefully.
- Oakland, CA · Member since 2017 · 6 posts · 3 votes9y
Berry,
Thanks for that bit of information.... That i was not aware of. My long term goals are to keep this property at least 10 to 15 years if not longer. From what i am seeing/reading, this area of Oakland should appreciate nicely over the next few years. Knowing that, what would you recommend for my property.... rent it right away or just live in it for a few years?
The tax part that I indicated does not affect your timing, when you want to rent it is totally your personal situation. If you need the money sure rent it right away or if you need the space keep it ;)
If you long term goal is to have another primary residence, for tax purposes you might consider leaving this as an investment property, will make it easier for you when you sell it. Best to ask your accountant for the the final advice in the matter, I am no expert, the info I gave was from personal experience. If I had know all this when I started renting part of my house I would have done my taxes differently.
- 9yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
Congrats on getting a property where you can make some money while you live there, and making a little sacrifice to live in the in-law instead of the more spacious main home. Good work. I have some property in Oakland also.
I am not an accountant, and you should check with one on IRS stuff, rather than take advice. Just be sure to document all the income and expense for now.
Basically, any expenses related to your rental property portion are deductible. And any portion related to your principal residence is accounted for slightly differently, as a non-investment property.1) Repairs to the main house for rental purposes are deductible. Longer-lived assets may need to be depreciated.
2) Yes, rental revenue is income.
3) It's not called renters' insurance (that's for the rental). But you can get a "landlord" policy. Importantly, get umbrella insurance coverage.4) I wouldn't worry about the owner-occupant requirement on the loan, IMHO, if I were living at the property.
As @Barry B. stated, there will be differences in capital gains exemption on the sale, or you would need to do a 1031 exchange. But the tax on sale can be either avoided or postponed.
Other advice) Understand rent control for Oakland. If there are 2 units on the property - even if one is non-permitted - the units are considered under rent control. You get an exemption from rent control if you stay for 2 years (while you live there), but doesn't sound like that's your intent. @Amanda Han, who wrote the tax book for Bigger Pockets, will be out in October on Oct 7. Read her book first, then come pick her brain with any follow-up questions.
Here is BP's tax guide: https://www.biggerpockets.com/renewsblog/2015/05/2...
Here is Oakland's rent control info: http://rapwp.oaklandnet.com/
Good luck Ernie! :)
- Hayward, CA · Member since 2017 · 91 posts · 40 votes8yFor insurance, the lesson that I have learned is to make sure you also increase your car insurance liability to the max(which is about 500k and 500k is little for a big car accident.) because now you have a big chunk of asset! You should talk to your insurance agent as to what you need, however if the loan term is what you are concerned about, you can’t make the move to get the rental insurance after closing anyways.
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