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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Hi I lease a three bedroom condo. I pay $2900 per month

Customer Question

Hi: I lease a three bedroom condo. I pay $2900 per month in rent to the owner of the condo. I have one housemate. I have a written agreement with that housemate that he gets one bedroom and use of the common area of the condo in exchange for paying me $800 per month towards rent. We also split the utilities in half. Am I required to pay income tax on the $800 that he pays me towards rent? Does it make a difference if the agreement we have is a "rent sharing agreement" that contemplates that we share the rent but that he pays the rent directly to me instead of to the landlord? Thanks for your help.
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

Let me map it out for you.

 

As I understand it:

 

1. You have a lease with the landlord or owner of the condo for 2900 a month. The house mate is not on the lease with you. apparently you must have the right to sublet.

 

2. So in accordance with your lease you have sublet space to your house mate for terms. He gets on bedroom and the use of the common area in exchange for 800 dollars per month. (which you "happen" to pay towards the rent you pay to the landlord).

 

Explanation: this is a sublet agreement whether a formal document exists or not. The house mate is paying 800 dollars in return for a service. there for he is not giving you a gift. He is also not paying it directly to the landlord, and he is not on the landlords lease. The guest has no legal obligation to pay anything to the landlord. The guest's legal obligation is to pay you 800 dollars in exchange for use of the space. The guest also pays half the utilities. BUT you are, by your lease with the landlord legally responsible for the utilities as well as the rent.

 

ANSWER: Technically and legally, you have to report the 800 dollars per month, AND the room mates share of the utilities as rent on schedule E. Because you also use the home but not the space he sleeps in , you have to apportion the expenses related to the rental income. Most likely in your situation you will be able to expense away a large portion if not all of the money received for rents including the portion for utilities.

 

use schedule E: http://www.irs.gov/pub/irs-pdf/f1040se.pdf

 

Use this publication to figure your apportionment based on your living arrangement. You can not depreciate the building because you do not own it. BUT you pay rent for the entire use of the building. So you can expense a percentage of that rent, by the percentage of space the roommate has dedicated to his use; that is the non-common area. http://www.irs.gov/pub/irs-pdf/p527.pdf

 

Of course, you can overcome all of this if you ask the landlord to add your room mate to the lease at a portion of the rents.

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 5 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Thanks.

Just to confirm: This is true even if the agreement I have with my housemate is a "Rent Sharing Agreement" that is written to indicate that he shares the rent and does so by paying me a portion of the rent which I use to pay the lease?

I am trying to figure out if it is work doing something like this instead of a simple sublet agreement.

Also: To confirm, I can only expense the part of the house he uses for himself even if we share the kitchen, dining area, etc.?

Thanks, Adam
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

Yes, that is correct. The IRS goes by the character of the payments, not on what you call it. Call it what you want, the payment is in exchange for rent of space or use of space on the premises. In exchange of space that you are legally responsible for by virtue of the lease you hold with the landlord.

 

A rose is a rose by any other name, right? Here is an example unrelated. Sometimes it is easier to see it at work in an unrelated situation. Regarding character of use or payment.

 

The IRS has rules that: If a person skins his car to advertise the business, and that car is used for both personal and business reasons, the skin does not convert the car to a business expense. It is the character of the car being used to go to the grocery store as a personal use, and to drive clients around as a business use. The so called 24 and 7 advertising on the car does not change the character of how the car is used. The expenses have to be apportioned.

 

The character of your situation is that he pays you money and half of the utilities, in exchange for the private use of one room, and shared use of a common area. You can call it what you want, but the IRS calls it rent.

 

Yes, because you use the common area together, you are using the common area, and you can only expenses the area he sleeps in. BUT there are some minor expenses you may be able to apportion 50%. Here is an example: If you hired a maid to clean the apartment. You can apportion the cost of the maid to the percentage of his room plus 50% of the common area. You could apportion the utilities to the same square footage apportionment.

 

It would be no more work whether you had a simple sublet or not. You have a sublet agreement right now, either written or verbal. It does not matter. As long as he is paying you for service, whether you call it sublet or call it a room mate would not matter. You have the same exact situation.

 

What would be easier is having him added to the lease you have with the landlord, and make his portion of the co tenant lease be 800 dollars. AND then for you to have the utility bill put into your and his name. then you are both legally obligated for the rent and you are both legally obligated to the utilities to the same person (landlord and utility company).

 

I can not tell you in this environment that many people in your situation do not bother with this. I would like to but I cann't.

 

 

 

NOTE: informatin provided is not intended for use of avoiding tax obligations.

Customer: replied 5 years ago.
Thanks for your help. You were very helpful.
Expert:  Ed Johnson replied 5 years ago.

Thank you for your comments and feedback. Good luck with this.

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