Investor · Evansville, IN · Member since 2016 · 22 posts · 5 votes
I am house hacking a duplex and have been planning on paying my business the same amount of "rent" that any other tenant would be required to pay but I just thought of it that doing so might not be the best idea. My main thought behind doing so was that I could build up a reserve quicker to be able to buy a second property since I can't spend it on personal expenses, but if I do this will that increase my "rental income" and make it harder for me to claim a loss on the property. If it will then I'm probably better off saving up for my second property outside of my "business" so that I can claim a greater loss but still set aside for future purchases. In all of my research I haven't ever heard that legally you have to pay yourself rent and count it as income but I don't want to unknowingly do anything illegal and then have to pay for it later. Is there a best way of handling this? Your advice is greatly appreciated!
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
@Tina Opel you need to sit down and talk to a tax accountant experienced in rental property. You do not want to pay yourself rent - that is not how it works. Your duplex is not 100% a rental property. Assuming both sides are equivalent, it is 50% in use as a rental property and 50% primary residence. That means you can only claim half your interest and taxes as a rental property deduction. You can only depreciate half the value. If utilities are shared, you can only claim half the expense. It is really like two separate properties in the eyes of the IRS. If you claim the entire property, that is tax fraud, which is why I suggested you sit down with a tax accountant.
Rental Property Investor · Davenport, FL · Member since 2016 · 593 posts · 382 votes
9y
@Tina Opel Just save the money outside of the business. You can make new cash investments into your business any time you want. So when you are ready to buy another property just deposit the money into your business account and that counts as new investment capital. I do this with my business. New investment capital gets deposited every month. Then do your depreciation based on the rent that you are collecting from the other tenant.
Investor · Evansville, IN · Member since 2016 · 22 posts · 5 votes
9y
So anything that I contribute to cover expenses (the tenant's rent doesn't quite cover the mortgage and escrows) would not be considered rent at all, but rather investment capital? I don't know why but it never occurred to me that I could contribute $0 in income even though I have to pay a few dollars each month anyway.
Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
9y
@Tina Opel - just from the lending perspective I would make sure you have separate accounts set up to pay rent and things like that. When you go to get another property, if you even have one payment come out of your personal account for rent, the bank may not give you credit for the business paying rent whatsoever.
You may not need it to qualify now or you may, obviously I have no idea. But it will become more important the more properties you string together. Just a heads up.
Investor · Evansville, IN · Member since 2016 · 22 posts · 5 votes
9y
I have a property account set up that all expenses come out of. If I have to contribute money in order to pay the expenses I transfer them from my personal account into the business account and then pay them out of the business account.
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y
Just put the money in a separate savings account each month. Do it automatically like you're paying rent. If a lender ever asks what the market value is, you can show them proof of your deposits as to what you were paying yourself. I did this for 2.5 years, saved a ton of money and helped pay down student loans at the same time.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
@Tina Opel you need to sit down and talk to a tax accountant experienced in rental property. You do not want to pay yourself rent - that is not how it works. Your duplex is not 100% a rental property. Assuming both sides are equivalent, it is 50% in use as a rental property and 50% primary residence. That means you can only claim half your interest and taxes as a rental property deduction. You can only depreciate half the value. If utilities are shared, you can only claim half the expense. It is really like two separate properties in the eyes of the IRS. If you claim the entire property, that is tax fraud, which is why I suggested you sit down with a tax accountant.
Investor · Evansville, IN · Member since 2016 · 22 posts · 5 votes
9y
Thank you all for your input! You confirmed what I thought might be the case so I'm glad I thought of it now rather than later. I will start holding the money in a personal account and I am definitely going to be finding a real estate CPA. There's so much to learn but I'm enjoying the process!
Elizabethtown, PA · Member since 2016 · 24 posts · 7 votes
9y
Curious as we're just getting into this situation now... wondering what others are doing?
I want to have a separate account set up to receive rental income from the one tenant, as well as pay for that side's repairs and the whole mortgage/insurance payment. But the rental income won't cover all of it. How do others do it? Do you just dump money into your real estate account each month? Do you pay your mortgage out of your own bank account instead? How do you handle finances when house hacking income doesn't cover it.
I'm buying my first duplex (hopefully this month!) living in one side and keeping the current tenant in the other. I've been planning on "paying rent" to myself and depositing it into my operating expenses checking account monthly but seems that might not be the best idea?