Should housemates' rent be claimed as income?

[Cynthia Hartley]

Hi all,

Can/Should a homeowner with housemates claim the income (rent) and a portion of expenses (landscape maintenance, cleaning service, utilities, home repairs) on taxes as a business expense, if it is the homeowner's primary residence? If so, are there any benefits to showing the income/expenses on tax returns for future investment property financing?

Thanks.

[Brandon Hall]

@Cynthia Hartley

The answer to your first question is yes, income from housemates should indeed be included on your tax returns as well as the corresponding expenses of renting rooms in your house. In fact, not including the income on your tax returns is called tax evasion, which is a fancy word for fraud.

Will it help with financing? It depends on how long you have been reporting rent on your tax returns and how much income you are generating. It likely won't make a significant impact, but every bit will help in terms of conventional financing.

[Jeff Brower]

From a future DTI standpoint I don't believe that you can use the income generated (by roommates) in order to reduce your ratio, even if you have two years of tax history. I remember reading this somewhere on BP. Do a search and im sure you can find some more info.

[Wilson Churchill]

I have been told by banks that they don't count roommate income. This is strange, since it is required by law to report the income.

[Steve Babiak]

Originally posted by @Wilson Churchill:

I have been told by banks that they don't count roommate income. This is strange, since it is required by law to report the income.

Because you can decide to no longer rent rooms in your home - thus the income goes away. But when you have a house that is and will continue to be a rental, your objective will be to always have tenants paying rent. 

[Wilson Churchill]

Originally posted by @Steve Babiak:

Originally posted by @Wilson Churchill:

I have been told by banks that they don't count roommate income. This is strange, since it is required by law to report the income.

Because you can decide to no longer rent rooms in your home - thus the income goes away. But when you have a house that is and will continue to be a rental, your objective will be to always have tenants paying rent. 

I could also decide to stop renting one of my rentals, and to live in it or allow family to stay there. Further, I purchased my home with the intent to continuously rent the rooms. It doesn't make logical sense to not allow income that is reported on a tax return properly.

[Marco G.]

You won't be able to get DTI credit on your housemate income for mortgage purposes. I just went through this. It's referred to as "boarder" income.

Your better bet it to rent the whole thing out and grab a cheap apartment if you can!

[Cynthia Hartley]

Thank you all for your input. Since I may be starting a new job a little further away from home, renting or buying in that neighborhood and completely rent out my current home may be the way to go. Much appreciated everyone!! 

[Steve Babiak]

Originally posted by @Wilson Churchill:

Originally posted by @Steve Babiak:

Originally posted by @Wilson Churchill:

I have been told by banks that they don't count roommate income. This is strange, since it is required by law to report the income.

Because you can decide to no longer rent rooms in your home - thus the income goes away. But when you have a house that is and will continue to be a rental, your objective will be to always have tenants paying rent. 

I could also decide to stop renting one of my rentals, and to live in it or allow family to stay there. Further, I purchased my home with the intent to continuously rent the rooms. It doesn't make logical sense to not allow income that is reported on a tax return properly.

So you would rather have the lender not count your income from rentals as well?  Again, this is how the lenders think of these - there might not be much logic involved, just rules and policies established over time (likely from having been burned too often in the past).

[Wilson Churchill]

Originally posted by @Steve Babiak:

Originally posted by @Wilson Churchill:

Originally posted by @Steve Babiak:

Originally posted by @Wilson Churchill:

I have been told by banks that they don't count roommate income. This is strange, since it is required by law to report the income.

Because you can decide to no longer rent rooms in your home - thus the income goes away. But when you have a house that is and will continue to be a rental, your objective will be to always have tenants paying rent. 

I could also decide to stop renting one of my rentals, and to live in it or allow family to stay there. Further, I purchased my home with the intent to continuously rent the rooms. It doesn't make logical sense to not allow income that is reported on a tax return properly.

So you would rather have the lender not count your income from rentals as well?  Again, this is how the lenders think of these - there might not be much logic involved, just rules and policies established over time (likely from having been burned too often in the past).

 Conversely, the lender should count all income. This seems akin to a sort of income discrimination. There are plenty of types of income that are less stable that the banks accept.