Tax Red flags on fully-owner occupied SFH + part owner occupied/rental SFH within 20m

[Josh Smith]

Hi,

I have a SFH1 (4bed/2bath) in which I live with my partner and kid and occupy fully. I also have another SFH2 (4bed/2bath) 20 miles away. In SFH2, I rent a couple of rooms out and keep the rest for my personal use. Personal use includes: storing of some family personal papers/records which I don’t want to keep at SFH1, sometimes I have a guest over who I don’t want to live with us, sometimes I need to sleep at SFH2 when I am working late at my job/taking a mental time out with my partner. Another reason is that renting only a couple rooms allows me access to SFH2 anytime I want vs renting it out fully means I don’t have as much access to the house, and I like the increased accessibility.

To put in perspective, both SFH1/SFH2 are ~1million houses in California.

1) Does this arrangement look odd from a tax perspective? Maybe the tax man will ask why do you need to part occupy another SFH2 house when you have spare bedrooms in your SFH1?

2) If its arrangement is ok, what would this SFH2 part-rental be called for tax purposes…would it be called a “second home”? I know it won’t be called a “vacation home”, as a “vacation home” needs to be at least 50 miles from your primary home.

3) Any tax (or otherwise) advantages/disadvantages of this SFH2 part-rental vs converting SFH2 into full rental (not occupying any of SFH2)?

Thanks!

[Sammy Habbaz]

1) you shouldn't worry that it looks wrong. Work with a professional, keep good records and you're good. 

2) don't think it would have a specific name. It's a cross between an investment property and personal use property. 

3) Assuming you don't qualify as a real estate professional, assuming your AGI is above 150K, and assuming that this isn't a short term rental, the losses are considered passive and limited to this specific activity. If you block off these rooms and don't use for personal reasons, there's leeway to say that the rooms are considered it's own activity and it won't be limited. 

 The most advantageous from a tax perspective would probably be to have that second home to be a short term rental. But I wouldn't make a decision solely for tax purposes.