Does this count as house hacking?

Question

I may have a house hacking opportunity with my primary residence. My sister and I are currently owners of a condo (2 bed 2 bath) and the plan is when I move away my sister will stay at the condo and her bf will move in and pay me rent ($950). I plan to use that rent to pay off home expenses and pocket the rest. We want to make small cosmetic changes to the condo as time goes on. Does that count as house hacking and would we be able to get tax benefits?

Eliott Elias · Answer

Make sure you put them on a lease. No if ands or buts

Jonathan Schwartz · Answer

Hi @Emily De Leon,

It's not the classic definition to house hacking (that usually involves multifamily), but you still have a "tenant" paying for a portion of your primary residence mortgage while allowing you to keep the property and at zero cost to you so, sure - why not. :)

As for tax benefits, it gets a little tricky as to how you are claiming the condo on your returns. Assuming that (since it's been your primary residence) you have both been claiming it as a primary residence with everything being split down the middle (mtg interest, property taxes, etc), then on your tax return you could switch from claiming it as a primary residence to claiming it as an income property. This would allow you to take the rent you receive, and apply it to half of the expenses plus allow you to start taking half of the depreciation. This would most likely generate a paper loss that is tax beneficial.

If you want your sister to also realize the benefits, then you'd have to figure out what part of the house is rented and what part is lived in. So, since it's a 2/2 let's say 50%. Your sister would take half of everything and claim it as 'owner occupied'. The remaining 50% could then be split between the two of you by converting 'half' the house into a rental. It's essentially the same thing as before, just that you are both splitting the business side, and she's also getting the owner occupied deduction. You'd lose your owner deduction though (at least if you did this by the books).

There could be some other benefits if you put in an LLC, but since your sister still lives there - I wouldn't advise that.

I'd go with where she claims half of it as owner occupied on her return, you claim half of it as investment, and then maybe you put your tax savings from the loss into that cosmetic repair fund. You keep monthly profit, but you both reap in the tax savings without making this difficult.

Another advantage of this is when there is a repair or upgrade you could realistically claim it was for the tenant, and take the full deduction. This would give you a bigger tax break since repairs are not deductible for the owner portion.

Hope this helps!

Jonathan

John Teachout · Answer

When there's a fight and one of the parties moves out, then what? Assume that will happen and plan accordingly.

Basit Siddiqi · Answer

It sounds like there is some personal use of the property(Your sister is an owner and living in the property).There is also a renter on the property paying rent.It is definitely tricky from a tax standpoint because there are multiple owners of a property where one person living there is using it for personal use and there is one tenant

Nicholas Coulter · Answer

@Emily De Leon Why not? It may not have been planned but it is going to all work the same! Congrats I'm sure you will want another one after this.

Mike Webber · Answer

Traditionally people consider house hacking: renting out a portion of your primary residence to help pay for the expenses. In this case it sounds like you would just be a normal investor (not living in the home) and your sister would be house hacking if she is 50/50 owner and renting out the room that you leave behind.

Either way, I think it is a great idea and wouldn't get too caught up in what you want to call it. Just call it a good investment :D  (assuming it is a good investment haha)

Russell Brazil · Answer

There is no househacking regulatory government agency that determines what is and what isnt househacking. It is completely subjective.

Christian Ehlers · Answer

I agree with John and Elliot here, there's never an issue, until there is. Couples break up all the time, and you'll want to be protected if your condo ends up in the middle of that. Have them on a strong lease, and be sure to explain that they can't just disappear if something goes wrong, they are liable for the terms of the agreement the same way they want you to uphold your end of the bargain.

Does this count as house hacking?

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