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bizmatters
bizmatters, Attorney
Category: Tax
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Experience:  Licensed Practicing Attorney
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Is tax due to IRS by me on roommates payment I rent from

Customer Question

Is tax due to IRS by me on roommate's payment? I rent from a Complex and now have roommate. I am sole leesee.
Submitted: 4 years ago.
Category: Tax
Expert:  bizmatters replied 4 years ago.

Dear XXXXX,

 

Thank you for your question.

 

Technially this income would be reported on form schedule E. You are subletting to a person who shares the apartment. However there may be little if any actual rental profits on which you have to pay tax. There are special rules realted to personal use property (and dual use).

 

I need to know the following in order to give a more complete and detailed answer.

 

1. Does the space used by your room mate have a seperate entrance?

 

2. Does the "room mate" actualy rent a seperate space, i.e. bedroom?

 

3. Does the room mate use or share common areas with you, such as kitchen, bath, living room, etc. (if the room mate has a seperate bath, let me know that as well).

 

 

Customer: replied 4 years ago.
This whole issue, in my opinion, is ridiculous to even have to ask about.

But here it is: Acctually, whether or not this is an actual Rental is an issue too.

I bet it's so complicated you can't even figure it out.

My roommate has never signed any Lease and this is NOT a verbal month to month rental.

I have prepared a Legal Contract called a Roommate Agreement that outlines the rights and obligations of the parties rooming together, and he has signed that. It refers to the original Residential Lease Agreement that I signed six months ago.

So far, unless you think I need an actual Lease between the two of us (AND can explain to me why) I will stay with the Roommate Agreement to avoid the appearance that I am Leasing anything for profit.

By the way, IF I needed to evict this person, the Complex is willing to file the correct forms.

Roommate is 20 years younger than me, works all the time, (6 yrs at one place) but I have let him occupy the Master Bedroom with an attached private bathroom, therefore, giving up a lot of space.

I use another bathroom, which he can use if he wants to, in the hall next to the laundry room. The hall is between the two bedrooms, as is the laundry room and the the second bathroom, used mostly by me but small enough to be considered a powder room, but has a small bathtub in it.

There is a washer and dryer and the bathroom between the two sleeping quarters.

We each have a key for the outside complex door and the apartment door. We each have our own parking spots, which come FREE here but are NOT designated. There is plenty of parking available.

May I Ask: What does the government want? Why can't two people share an apartment? OK, one has bad credit and can't be on the lease. In this economy with 30% interest rates and poor or non-existant health insurance credit good enough to get a decent apartment is hard to have.


This roommate situation is happening everywhere, (as I have traveled a lot) but I want to do things right.

Most people have nowhere to live without a job, or between jobs, they lose their credit rating, so then they can't get an apartment.

The one who has survived this economic MESS signs the expensive lease (which is common now) Housing has gone down in this area (Chicagoland) but the rentals have gone up! (Because of demand)

Two incomes are needed to live in an apartment around here that is not a dump.

I am fed up with the fact that any government would want to tax money that helps anyone stay out of a shelter or stop sleeping in their car. (which my current roommate did for 3 weeks)

This country needs some real change or it will be the 20's again, in my opinion. And 100 years ago taking in a "roomer" was common. It wasn't TAXED either.


Very Upset,
but Thank you,

J. Anderson

Expert:  bizmatters replied 4 years ago.

Dear XXXXX,

 

Here is the difference:

 

If you and the room mate were paying rent to the landlord directly together, then you do not have to report income.

 

However since you pay rent to the landlord on your lease with him, and then rent space to a room mate, then you have to report that as income.

 

Likewise, if it is your lease and rent obligation for which you alone are obligated, and the room mate pays the landlord for you, then you still have to report it as income.

 

In order to avoid this as income, you and the room mate have to be legally obligated for the basic rent and pay your fair shares to the landlord.

 

Under your scenario you would be required to report the rent. However you are also entitled to take certain expenses.

 

If your room mate also pays part of your utilities, that is also considered income.

 

So here is how it would work.

 

1. Report income received from room mate on schedule E.

2. Then take the following expenses as a minimum:

 

a. For the bathroom and master bedroom that he uses by himself: apportion the floor space by percentage of the whole apartment. I.e. Apartment is 800 square feet, and the bath room and master bedroom are 300 square feet, Then 300/800 square feet X the amount of rent you pay for the entire apartment is expense.

 

b. Apportion the utilities between you and him (common area).

 

Because there are no separate entrances, and the property is also personal use, you can not take more than the income as expenses. (no passive loss carryovers as it would be with a regular rental unit)

 

Please see this publication, in particular section called personal use property or dual use property: http://www.irs.gov/pub/irs-pdf/p527.pdf

 

http://www.irs.gov/pub/irs-pdf/f1040se.pdf

 

Customer: replied 4 years ago.
Thanks for your reply.

You can see, I hope, why this is upsetting, especially in a poor economy, and when I am allowed by the Complex to do a "partial sublet."

I do not "own" the property that this roommate is occupying, so why would leasing it be taxable? I am not leasing my own property.

I can understand it being a breach of the original Residential Lease Agreement if permission was not given in writing, but a taxable event? Come on.

It is almost more difficult to get an appartment around here with poor credit than to buy a cheap home or a forclosure, etc.

I assume that any Lease between the two roommates (BTW I was a paralegal)would be useless from what you have said. Am I correct?

The Roommate Agreement is helpful. I believe it is a Legal Ccontract between two consenting and capable adults, and can be enforced if necessary in small claims court or the District Court in Du Page County, IL. I am keeping it.

The Roommate Agreement covers 6 (six) months, and if any roommate doesn't give a certain notice (1/2 of the notice in the Residential Lease Agreement)and leaves a disastor, there are consequences in it (fees)

It holds the roommates harmless for personal injury caused by anything other than gross negligence or an intentional act.
e.g. tripping on a carpet, slipping in the tub, etc.

OK, I should prorate the size of the apartment, and deduct the cost of his portion and apportion the utilities.

It takes a very long time to get anyone to actually want to sign a lease with a stranger (It is almost impossible) and I can understand it. Credit, usually is the reason, but they don't know me either.

If I owned a home and rented out a room or two I guess things would be the same, but in that case I would be building equity in the property. That is why this just doesn't make sense to me.

I will write to my representative because this just doesn't make any sense to me.

Thank you again, and if you have any other insights, please let me know your throughts.

J. Anderson

P.S. The disability status makes no difference, is that correct? I will assume so if I don't hear from you. I am 60, so age is not an issue either I assume.   









Expert:  bizmatters replied 4 years ago.

Dear XXXXX,

 

thanks for getting back to me. I am sorry, but I can not comment on the rightness, wrongness, or on what may seem preposterous about our tax laws, and the congress who passes those laws.

 

I am merely sharing legal information with you regarding taxes and renting to a room mate. As you may be aware, many categories of income are considered a taxable event, that may seem preposterous. For example, they got Al Capone for tax evasion, because even illegal gains are supposed to be reported.

 

You asked: I assume that any Lease between the two roommates (BTW I was a paralegal)would be useless from what you have said. Am I correct? ANSWER: I do not know what you mean by useless. If you mean in regard to tax ability of the income, you are correct. A written lease between roommates does document and provide conditions of the rental so that you and the room mate do not have issues later on. For example, if he or she does not pay, you will have a document with which to substantiate his or her contractual obligation to pay. Oral agreements are enforcible in court, but it is harder to do. There is an old adage, that an oral contract is only as good as the paper it is written on.

 

I do not know how much you are charging your room mate. BUT, in most instances, the expenses normally equal or exceed the rents. If the furnishings in the room are your furnishings, then you can depreciate them as well.

 

Your disability does not matter, except that if you have to make modifications to your apartment at your own expense to accommodate your disability, all or a portion may be tax deductible.

 



Edited by bizmatters on 9/25/2009 at 1:01 AM EST

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