Renting Out Basement

[Troy DeLong]

Consider this a hypothetical situation. Say a family member (different last name) was to rent out a room in your basement for $500/month (Market value for similar would be around $700/month). Most people (homeowner) would just keep this off the books and it wouldn’t be a problem. But if someone (homeowner) wanted that $500/month to show up as ‘Income’ to better help them with getting loans for investment properties, what would be the best way to account for the $500/month? Would that be considered rental income and taxed at your regular income tax? Would you need to have an actual lease agreement in place? Should you put that rent money into a new/separate bank account? Would a lender even care about or consider that $500/month as income to better your chance of a loan? Thanks in advance!

[Filipe Pereira]

What would be the best way to account for the $500/month? 

Schedule E is how rental income is reported for tax purposes. Check with your CPA to confirm if this works for your scenario.  

Would that be considered rental income and taxed at your regular income tax?

Yes, it's rental income. Yes, should be taxed at your regular income tax rate.

Would you need to have an actual lease agreement in place?

No, but your lender will probably ask for one.

Should you put that rent money into a new/separate bank account?

Yes, that would help, but not necessary. 

Would a lender even care about or consider that $500/month as income to better your chance of a loan?

Yes, they should

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And as @Theresa Harris mentioned, this opens the door to now being able to take writes offs on the property. Look into tax write offs for owner occupied multi family properties. I imagine it will be pretty similar, but I am not a CPA.

Did I mention I am not a CPA?