A question about "gift tax"...

[ScrimpAndSave]

This hypothetical - so just stay with me for a second...

I have a roommate that gives me rent. Instead of paying monthly, she gives me a lump some each year. Without a tenant agreement, is it possible that the government would see this as a "gift tax" if the total amount is above $13,000? (which is the amount that I believe gifts begin to be taxed).

I hope you understand my question...


I found this information at Internal Revenue Service

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

So the rented space would be what is received in return of the lump some?

[mdcrim]

If your roommate is paying you rent, whether it is monthly or yearly, you should be reporting this rent as income on your tax returns. If you're reporting this as income, it would not be considered to be a gift.

[disneysteve]

I agree with mdcrim. This is rent. She isn't giving it to you for no reason. And it isn't a gift to you, it is rental income and should be reported accordingly.

[ScrimpAndSave]

Ah ok, I did not know that rent needed to be recorded. All new to me!

[disneysteve]

All income needs to be reported and if you are renting a room, you should have everything in writing. There should be a written rental agreement spelling out all of the terms and conditions of the rental, how much the rent is, when it is due, etc.

[ScrimpAndSave]

Thanks Disneysteve. I need to get all of that in order.

[jIM_Ohio]

SnS- if you rent, you have more deductions available to offset the income.

For example:
you have a new schedule to fill out (their is a schedule specific to rental income)
you have new deductions (you can claim the depreciation of the space used by the renter and the costs you incur from renting- for example utilities).

Go to turbo tax online or a similar tax software and plug the info in.

Most people which rent out would come out ahead the years they have rental income, and you might incur more tax when you sell the house (because if you depreciate your house, then sell it, you have a larger capital gain which is subject to tax).

[wincrasher]

It depends on other details.

If you are renting your home, and have a roomate then you are in-effect splitting the rent. So that is not income.

If you own your home, and you are renting out a room, then that is income. You can offset some of this income by the expenses of having a tenant - like if you pay the utilities, if you did improvements (new paint or carpet, furnishings, etc), advertising, etc.

I would not go down the road of trying to depreciate a portion of the value of your home and creating a complex tax mess. You'll basically wipe out your tax exemption when and if you sell your home (that is, if you sell it at a profit).

[jIM_Ohio]

It depends on other details.

If you are renting your home, and have a roomate then you are in-effect splitting the rent. So that is not income.

If you own your home, and you are renting out a room, then that is income. You can offset some of this income by the expenses of having a tenant - like if you pay the utilities, if you did improvements (new paint or carpet, furnishings, etc), advertising, etc.

I would not go down the road of trying to depreciate a portion of the value of your home and creating a complex tax mess. You'll basically wipe out your tax exemption when and if you sell your home (that is, if you sell it at a profit).

If you claim the rental income, you might as well claim the depreciation, because when you sell, you will need to claim the depreciation anyway (that is the way I understood rentals in my tax class). If you ever sell a building which you rented, the tax form requires you to put the depreciation, whether you claimed it or not is irrelevant- so you might as well claim it as you go.

[disneysteve]

There are may be issues with capital gains when you sell a rental property. I have a relative who owns a duplex. He lives on one floor and rents the other. He will be selling it this year and the accountant told him he will have to pay capital gains on a portion of the appreciated value of the property due to it being a rental even though he lived there, too. I'm not sure if that applies to a single family unit with a roommate but certainly something you need to ask your accountant.

[wincrasher]

That is fine if you are renting out a building or home in it's entirety.

Renting out a room is another matter entirely. Especially one that is also owner-occupied, as is the case here.

Once you enter into depreciating the value of the "room", you also give up your exemption for the sale profits, plus you complicate your home mortgage interest deduction. I'm just saying that it's not worth this complication and will most likely cost you in the end, if not open you up for an audit.

You are never "required" to take any depreciations or deductions. That is solely up to the filer. The Treasury could care less if you don't claim all you are entitled. They just care if you take too much.

Many folks do not claim rental income from situations like this (they should).

Most rental situations are renting houses and apartments outright. In that case, or in a boarding house type situation, it is definately recommended to set it up as a business and take all the deductions and depreciations as you can.

[mom-from-missouri]

Back when I had a roommate my tax person told me that was not rental income--since we both lived there, even though I owned the home.

However, the rental units I have now I do not live in, and thus it is considered income. I track and report it all--income, repairs, mileage to and from for inspections and work, insurance, taxes......

[wincrasher]

I would think a duplex would be fairly easy tax-wise. You split the value of the property in two, since their are two, most likely equal, living units.

Another idea would be to set up an LLC to hold the entire property. Then I'd rent my unit from the LLC, and have the other tenant do the same. That makes the entire building a business and affords you more deductions and depreciation.

[jIM_Ohio]

a way around doing this is to have each person living in house pay for 100% of a given utility

that way all checks written are to a municipality.... and then pay cash to settle up the difference.

tax wise you get to claim the depreciation based on a percentage established by square footage.

I would not be asking tax questions to this forum... there are a couple of accountants here, but for tax advice I use tax boards, and this is clearly a tax matter.

[ScrimpAndSave]

Thank you all!