Taxes & rental income

[Derone Patterson]

Just purchased a duplex as an owner occupier with me living in the basement and renting out the top two floors. Just got my taxes done and I'm confused on how I go about getting my rental income reported to the IRS

[Linda Weygant]

Househacking taxes are a bit more convulted than just sticking the income and expenses on a Schedule E.

For example, your property taxes and mortgage interest (and PMI, if applicable) will be deductible on both Schedule E AND Schedule A, but clearly you cannot double deduct. You've got to allocate.

For my clients, I do this by filling out form 8829, Business Use of the Home.  Essentially, you'll set up the 8829 calculating everything on a square footage percentage basis.  Everything applicable to the Schedule E flows through there.  Everything applicable to a Schedule A will then flow through there.  As long as you've set everything up correctly, all of the flow throughs should work out just fine.  

This makes things very easy once you move out of the unit you're in (as most house hackers eventually do).  You reallocate the house asset from a percentage of personal use to 100% business use and just continue on.

Otherwise, your basis becomes messy down the road and becomes a bit more difficult to trace.  You've also got issues with one asset being placed in service over multiple dates, which also over-complicates things.