Reporting rent income

[Antonio Esquivel]

Hey everyone,

I just recently purchased my first house and I will close in about a month. The house is a 4bed 2 1/2 bath. Me and 3 other friends will be moving into the house.

Now my questions is, the rent that my friends will pay will be $1050 a month combined, $350 each. And that will include rent, all utilities, tv, and internet. As far as my expenses, it will be at around $1000 a month. So I will live for free.

When I report this to the irs, I'm assuming I will no longer get a tax return because of this income and instead I would owe money each year. Is there anyway where I can deduct all of my expenses if I set it up as a business? It seems unfair to pay more taxes when I really don't make anymore disposable income. I apologize if these things might seem like no brainier kind of stuff but I'm not too familiar with tax rules.

[Keith Barton]

I apologize - part of my 1st post was INCORRECT.

I neglected to take into account the different rules for renting out a property that is also used for personal use: in this case, renting a portion of the property that is your main home.

IRS Publication 527 discusses both situations: residential rental property that is not used for personal purposes; and, residential rental property that is also used for personal purposes.

In this scenario (using property both as your home and as a rental property), you cannot deduct rental expenses (including depreciation) that exceed the amount of rental income. However, you can carry forward any excess (including depreciation) expenses to future years.

To figure your expenses in this situation, you would apportion the expenses based on the ration of rental use and personal use. As Ken mentioned, if you apportion 67% of the home to rental use and 33% to personal use - then 2/3 of the mortgage interest would be classified as a rental expense and 1/3 of the mortgage interest would be listed on your Schedule A (if you itemize deductions) - same for real estate taxes, etc.... Again, depreciation would have to be apportioned accordingly.

Again, I apologize for the inaccurate information the first time I posted.