Ask K5: Income Taxes on Shared Living Expenses By nine4mortal in nine4mortal's Diary Thu May 20, 2004 at 03:42:41 PM EST Tags: (all tags)
	My girlfriend and I are thinking of having her move in with me. We both work and we want to maintain an air of equitability in the relationship, so we both think she should contribute towards the cost of running my condo. What are the tax implications? (more inside)

First off, here are the vital facts: I live in the Bay Area of California, so I am interested US tax law. (California law is likely the same as Federal law, but if it is not, that is important too.) I am not interested in hearing that there is no way the IRS will ever catch me if I do not pay tax on money my girlfriend puts towards living expenses. Not paying your taxes is a felony. What I am really after is a link to an IRS publication that definitively answers my question. Failing that, I would like a link to an established accountant or a link to a court ruling. I own a condo, but I have a mortgage. My girlfriend and I have agreed that the right things to share would be the running costs of the place, but not the investment value. This basically includes Mortgage Interest Property Tax Utilities HOA Dues It does not include principle on the mortgage because she is not going to be aquiring any ownership. We have no immediate plans to get married, and I would not like to make her my dependent. Here is what I have found so far: Publication 527: Residential Rental Property Publication 523: Selling Your Home Publication 551: Basis of Assets Of these, Publication 527 is the most important. 523 and 551 discuss depreciation and its effect on the cost basis of your home when you sell it. This matters, but it is a secondary effect. The only thing to understand is that what you gain from depreciation now you will pay back when you sell, so it's not really a benefit. In the absence of special information for a girlfriend, I assume I need to treat her like a tenant who rents half of my condo. The accounting here is a little hairy because I have to divide my home into rental and non-rental portions, but other than that, it does not look so bad... at first. The half of my home that is to be rented would be a business, and I can deduct business expenses. Mortgage interest, property tax, utilities, and HOA dues can all be considered business expenses. At first glance it looks like if she pays me up to my cost, there are no taxes to be paid. I report the money when it comes in, and I keep receipts for what I spent it on. I pay taxes on the difference. If we keep that difference zero (or negative) then there is no tax. Here's the problem. As a homeowner, I can already deduct all of my property tax and mortgage interest from my income tax (without there being any rent.) At $1275/month, those form the lion's share of my costs anyway. Utilities and HOA dues only come to another $400/month or so. If I rent "half" of my condo to my girlfriend, suddenly I can no longer deduct half of my property tax or mortgage interest from my normal income tax. Thus, while I would be getting some new income (probably about $700/month) I would be getting almost nothing in the way of new deductions. (Note that deductions associated with the rental half of my condo cannot exceed the income it generates.) What this comes down to is that my girlfriend an I together would lose about $258/month in taxes if she pays me rent. If she does not contribute at all then we (the couple) keep the money, but we cannot have the true shared arrangement we want. $248/month is a lot of money. Suppose we get married two years from now. By her not contributing towards expenses now, we would have an additional $6,192 to spend on our honeymoon! Short of her just not paying anything towards running costs on the condo, is there any legal way out of this? Is there some way of structuring our arrangement (short of marriage) to solve this? Here are some ideas I have: I disconnect my phone service and internet service. She orders phone service and internet service in her own name. The bill comes to her. (This is only about $50/month, but it would be a start.) She pays for groceries directly. (This may count as rent, and therefore be taxable, but if the money never reaches my hands and she is my live-in girlfriend, it seems a case can be made it does not. After all, since when is it a taxable event for your girlfriend to buy you dinner?) Obviously neither of the above ideas could be formalized. They would have to be carried out on a purely good-faith basis (which I'm comfortable with.) If we have a lease specifying she buys groceries, then it's clearly rent. However, if she is never under any contractual or legal obligation to get me gorceries, I think we might be in the clear. Any info would be appreciated!

Related Links

Publicatio n 527: Residential Rental Property Publicatio n 523: Selling Your Home Publicatio n 551: Basis of Assets nine4mortal's Diary