Renting my Owner occupied home while i live in the In-Law

[Ernie Espinoza]

I just purchased my first single family 3 bedroom house that came with a non-permitted detached in-law unit in the back, typical for Oakland Ca. I am planning on living in the in-law unit since I got an owner occupied FHA loan. I am planning on living in this Oakland property for a year, then purchasing my second property as soon as I can. I am new to this so I have a few questions.

1. Are the repairs to the main house such as paint, carpet, HW floors deductible since I’m renting it?

2. Is the rental considered income…?

3. I do have home owners insurance, would I need to get an additional renters insurance…?

4. Is there anything else, good or bad that I need to be aware of in doing this? My loan officer said as long as I am living on the property which I am, I am not committing fraud. All utilities are in my name, just in case i need proof that i live on the property.

Thanks,

Ernie

[Barry B.]

I think for the loan purposes you should be ok. The one long term ramification of this that I know of is that if you ever want to claim the $250k (for singles) or $500k (for couples) deduction on capital gains when selling your primary residence, this effects that calculation. I believe the rule is that you can deduct a proportional amount to what you use as primary residence and for proportionate number of years. The popular misconception is that if you stay in your primary residence again for 2-3 years you can claim the full amount but as per my accountant, that is not true. The impact of ever having rented your home stays with you forever, you can dilute the percentage by making your own stay longer but it will never go back to zero. Also, when you report the rental income on your taxes, that portion of the house is considered investment income, so technically you can take depreciation on it. However, if you do and you want to then declare it as a primary residence for sale purposes, you have to report all that depreciation as income. Depending on your long term goals with the property, report your income carefully.