We recently spoke with Erik Sherman of the National Association of Realtors to discuss the biggest homeowner tax mistakes. Below is an except from the article.
6 Homeowner Tax Mistakes Accountants Say to Watch For
“4. Understanding Rental Income
Renting out a room or wing of your house on Airbnb can be a fun way to meet new people and make extra income. It can also have several important tax implications.
When renting out a room in your personal residence, says Greg Freyman, managing partner with Freyman CPA in New York City and Westwood, N.J., the amount of mortgage interest and real estate taxes you can claim as itemized deductions changes. You can only deduct MID and real estate taxes for the portion of the house that isn’t rented. So, if you have a 2,000-square-foot house and rent out a room of 100 square feet, you can deduct 95% of the mortgage interest and taxes on Schedule A.
However, because the rented space is now converted to investment property, you can also take deductions on your rental expenses. Some examples are the rental area’s portion of overall maintenance and utilities, again calculated by the percentage of overall square footage.
But (there’s always a but when it comes to taxes) you can only claim those rental expenses for the time period you rented the space, says Honolulu-based Crystal Stranger, president of 1st Tax Inc. and an enrolled agent who can represent taxpayers before the IRS. If you rented that 100-square-foot room mentioned above, which is 5% of the total space, for a total of six months, you’d take 5% of the maintenance and utilities, divide them by half, and then deduct that amount on Schedule E.
5. Paying a Relative’s Mortgage
Good on you for helping someone in need by covering their mortgage payment, but be a smart philanthropist. No one will get any deductions for those payments if you directly pay the lender, Freyman says, unless you’re listed on the deed.
To increase the chances that someone snags the deduction, make a gift of the money to your parent or other beneficiary and let her be the one to pay the bills — although you won’t get any tax benefit unless you can claim her as a dependent. Treating a relative who doesn’t live with you as a dependent means meeting certain requirements. For instance, you need to have a certain type of relationship with the person and the relative must pass a gross income test.
Also, remember that there’s a limit on the amount of money you can give someone in a year — $14,000 — without incurring a gift tax. If you exceed the annual total, you may have to pay the tax.”