House hacking taxes?

[Katie Bustos]

We are buying our primary residence and it will have a 1 bedroom garage apartment in the back. We will start by renting this out to my father in law. Is this considered a rental property? Is there anything we need to do for taxes? Can any part of the studio apartment be tax deductible?

[Katherine Serrell]

Hi Katie - CPA here!

Yes - this is considered a rental property. Yes - there are things you need to do for tax purposes. Yes - the entire studio apartment can be deducted. 

Since the studio apartment is now an income generating asset...any expenses associated with the studio apartment are deductible. You can deduct a proportionate amount of your mortgage interest, property taxes, insurance, electricity, water, gas, etc. and you can deduct any expenses that are directly associated with the portion of the property that is being rented out. You can even deduct the depreciation. After taking all of those deductions, it is unlikely that you will ultimately owe any taxes on the rental income. 

Between now and the end of the year, you just need make sure you keep track of expenses, receipts, etc and at the end of the year your CPA can handle it. If you do your own taxes and use TurboTax or a similar site, there are prompts that will guide you how to treat these expenses for tax purposes. 

[Laura Shinkle]

Everything Katherine just said lol. I'll second that you want to make sure you keep a record of receipts and expenses (even potentially your time) for getting the property up and running as an investment. Treat it like an investment, not just where your FIL lives, and keep the expenses separate. That way when your Father in law moves out and a tenant moves in, you've got your systems in place :) 

[Ryan Thomson]

@Katie Bustos it sure is! Take the square footage of the apartment as a percentage of the total square footage. Once you have that, you can consider the percentage of your property as a rental. You can use this for deducting whole property expenses and for depreciation. Talk to an accountant they are worth every penny. 

[Edward Adams]

In general, if you're renting out the garage apartment to your father-in-law, it would be considered a rental property for tax purposes. Rental income is typically subject to taxation, and you may need to report the rental income on your tax return. Additionally, there may be deductions and credits available to you as a landlord.

Some potential tax deductions related to rental properties include:

1. Mortgage interest: If you have a mortgage on the property, you may be able to deduct the interest you pay on that mortgage.
2. Property taxes: You can typically deduct the property taxes you pay on the rental property.
3. Depreciation: Rental properties are subject to depreciation, which is an allowance for the wear and tear of the property over time. You may be able to deduct a portion of the property's cost each year.
4. Repairs and maintenance: Expenses related to repairs and maintenance of the rental property are generally deductible. It's important to distinguish between repairs (deductible) and improvements (generally not immediately deductible).
5. Utilities and other expenses: You may be able to deduct certain expenses directly related to the rental property, such as utilities or advertising costs.

[Sweigh Emily Spilkin]

Quote from @Katherine Serrell:

Hi Katie - CPA here!

Yes - this is considered a rental property. Yes - there are things you need to do for tax purposes. Yes - the entire studio apartment can be deducted. 

Since the studio apartment is now an income generating asset...any expenses associated with the studio apartment are deductible. You can deduct a proportionate amount of your mortgage interest, property taxes, insurance, electricity, water, gas, etc. and you can deduct any expenses that are directly associated with the portion of the property that is being rented out. You can even deduct the depreciation. After taking all of those deductions, it is unlikely that you will ultimately owe any taxes on the rental income. 

Between now and the end of the year, you just need make sure you keep track of expenses, receipts, etc and at the end of the year your CPA can handle it. If you do your own taxes and use TurboTax or a similar site, there are prompts that will guide you how to treat these expenses for tax purposes. 

Hi Katherine! I have a follow-up question. I am house hacking and doing my taxes right now (online with tax software). After all my deductions and depreciation I have a Net Operating Loss. Can I use that to bring my income tax down as well? It looks like there's some sort of rule that up to $25,000 can be used as a deduction against income if you are in a certain tax bracket. Is that right? I can't quite find it and with the tax software it's a bit confusing. I do see where it asks me to check the box if I am an active real estate professional, but that looks like it requires 750 hours in a year of work, and I probably had more like 500 or so all together. I know you aren't MY tax professional, but if you have a minute, to let me know your thoughts I would greatly appreciate it!!! Thank you so much. 

[Wale Lawal]

@Katie Bustos

When you buy a home with a rental unit, like a garage apartment, how you're taxed can change based on how you use the property and if you rent to family or others. The IRS treats rental income from family differently from other renters. This means you need to report your rental income on your tax return, which is usually taxable, but you might be able to take deductions for rental expenses like mortgage interest, property taxes, utilities, repairs, and upkeep.

When you work from home, you can deduct expenses related to using your property for business purposes. These expenses include utilities, insurance, and depreciation. Depreciation is a tax break that spreads out the cost of your property over time. Money earned from renting out your property and the expenses from doing so are usually recorded on Schedule E of your tax return. Keeping thorough records of rental income, expenses, and paperwork is crucial. Seeking advice from a tax advisor or accountant can assist in understanding the tax effects of renting out a garage apartment.

Good luck!

[Max Emory]

@Katie Bustos, I love the househack model! Great job on that! We're on our 2nd one now.

It looks like your questions were answered but I just wanted to congratulate you!