Ask the tax adviser
Rental vs. personal property
Dear Tax Talk:
I am in the process of purchasing a second home for our two sons
who attend college. We are considering renting out two of the rooms
to other students. Would it be better to keep the house solely for
the purposes of our sons, thus being able to deduct the full interest,
or claim it fully as a rental property, taking the depreciation
and upkeep deductions? Or would it qualify as a part personal use,
part rental property whereby we could deduct some of the mortgage
interest and also some of the depreciation and upkeep?
In more than 15 years of practice, I have never had a clear answer
on the situation you describe. In effect, you will be taking on
boarders that will use a portion of the home, which should make
the property part rental property. If two of the rooms represent
half the home, then half of the expenses should be reported as rental
property expenses on Schedule E against the rent received.
Rental expenses would include mortgage interest and
taxes, which are otherwise deductible without regard to the rental
activity (the interest being treated as second home interest), insurance,
association dues, utilities and also a deduction for depreciation.
Since the residence is used in part for personal purposes (your
sons occupy the home), the law does not permit a loss from the rental
Alternatively, if your sons just took on roommates
or persons that were allowed to use the home rent-free, then you
wouldn't have the rental activity issue to deal with. Obviously,
the roommates would make some sort of contribution to the household,
such as food or utilities to justify their use of the property.
However, what is not clear is if the Internal Revenue Service would
try to recharacterize this as a rental activity and deem this other
support as disguised rent. Your counter argument would be that the
roommate relationship is not a business relationship and therefore
should not be treated as a rental activity.
For example, assume your sons allowed their girlfriends
to live rent-free in the house. Why would their contributions to
household expenses result in income when it is a personal relationship?
My opinion is it should not be a rental activity. The benefit for
you would be that you would not be reporting rental income and would
be claiming a deduction for the interest and taxes. You should probably
discuss your options further with your professional tax adviser.
Home sale exclusions for separate filers
Dear Tax Talk:
If you are married but separated and each spouse lives in a separate
home (but owned by both) and each meets the requirements of two
years living in and owning each home, would each one be entitled
to up to $250,000 gain without tax?
An individual is allowed to exclude up to $250,000 in gain from
the sale of a principal residence that he or she has owned and lived
in for two of the last five years. A married couple filing a joint
return can exclude up to $500,000 in gain, which can be from the
sale of two residences, up to $250,000 in gain on each. A married
couple filing separate returns can each exclude $250,000 in gain
from the sale of their joint or separately owned residence.
-- Posted: June 22, 2002