Tax Advice - College Rental Property

[Brian Henry]

I bought a property last April that my son and 2 college student roommates are living in.  Getting ready to do taxes for the 1st time since purchasing.  Do I treat the property as 1/3 second home that my son lives in and 2/3 rental?  Or just treat as a 100% rental and include my son's rent payments as income?  Do I have an option?  If so, is there an advantage to doing it one way or the other?  Thanks in advance for any advice.

[Ashish Acharya]

Originally posted by @Brian Henry:

@Ashish Acharya - Thanks for the insights.....it does seem complicated.  My understanding is that I could treat 1/3 of the house as a residence (the part my son lives in as his primary residence for the year).....and for that part I could deduct 1/3 of the mortgage interest and not record any income from my Son (which is really from me redirecting money I would have paid the college or a landlord for his rent).  I could then treat the remaining 2/3 of the house as a rental....reporting the income and depreciating 2/3 of the house and writing off 2/3 of the expenses?

I have not run the numbers to really know whether this is better than just treating the whole thing as a rental.......It would seem a lot cleaner and simpler to make it 100% rental

 @Michael Plaks , Please correct me if I am wrong, but the house he is renting to his son cannot be his personal residence. It can be his qualified residence-second home (if he only has two houses ), and he can itemize his deduction Like you mentioned above. 

If this is not your second home, you can not itemize deduct if you were planning to. 

Difference between a primary residence and qualified residence is important because you do not get sec 121 exclusion of 500k when you sell the qualified residence. 

Also, 

If you son pays the rent and if it is his primary residence, It will be 100% rental so no issue, but I understand that you do not want to do that because son basically is paying your money back to you ( if he does not work) and you will get taxed twice for that money . However, if he works, it's better for him to pay you the rent because he would be paying rent to someone else if you were not in the picture anyway. And, you get to treat he house as 100% rental with no complication. 

BUT, Most likely this is going to happen: 

If your son doesn't pay rent (or pays Below FMV) even though if it is his primary residence, so the house is considered Residence with personal use and your income is limited as mentioned above.