Taxes from personal residence to house hacking to rental

[JD Barrera]

Hi everyone, I have a question about taxes. I know I need to talk to a CPA about this really, and I will, just wanted to hear form the community also..  so here is the deal: 

I am under contract right now on a 3/2 townhouse in San Jose, CA hoping to close soon (fingers crossed!). I will be living there with my wife as our personal residence to finally get out of this insane rental market in Silicon Valley. I know that as a personal residence we will be able to deduct mortgage interest and property taxes to lower our overall housing cost (since we would not be able to deduct this otherwise by renting.. so I am including this as a way to lower housing expenses). In a couple months of living there, we plan to have a good friend of ours move in to one of the bedrooms to take advantage of the house hacking strategy. So my first line of questions is this: 1) How will this change my tax situation... Will we still be able to deduct mortgage interest and property taxes? Will we also be able to take advantage of depreciation?  

Down the line, after we have built up enough equity, we plan to refi and make this thing potentially cash flow as a rental. So my second line of questions, similar to the first, is: 2) How will this change my tax situation... Are mortgage interest and property taxes still deductible as a full rental? I'm pretty sure depreciation will certainly be an option here as will and just want to confirm. 

Let me know what you think and if I am missing anything big! 

[Larry Stone]

JD,

I have not heard the term "house hacking".  Are you referring to renting a room to your friend in your personal residence?  If so, you are required to declare the rent received.  In addition you are allowed to deduct a percentage of all expenses incurred to rent the room based on the square footage of the room to the total house.  Deduction is allowed as a deduction.  You are only allowed to offset the rents received with your deductible expenses.  Any losses are not allowed to offset your income unless the rental space qualifies as a "lock-off".   Mortgage interest and property taxes are deductible as personal itemized deductions to the extent that they are not allocable to the rental portion of the residence.  I recommend that you seek a assistance with someone who specializes in tax planning in regards to this issue.  They should be able to explain what to do, how to do it, when to do it and why it should be done.