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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:

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!

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


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Ask K5: Income Taxes on Shared Living Expenses | 22 comments (22 topical, editorial, 0 hidden)
I simply cant belive (none / 2) (#1)
by Altus on Thu May 20, 2004 at 03:55:55 PM EST

that you are going through this much trouble.

hire an accountant to give you some advice...  check with your contacts to see if you can get some free advice from an accountant

or just go with cash.  the government is going to get your money in the form of property tax.  hell, they arent going to let her write off the part of the mortgage interest that she pays... will you be wrting off the interest that she pays?  

trying to interpert the tax code is a long and drawn out process, I would certainly not trust K5 to help you with it.  people do these things all the time and a professional can probably help you with the process alot.

 
"In America, first you get the sugar, then you get the power, then you get the women..." -H. Simpson

Ha. (none / 2) (#2)
by James A C Joyce on Thu May 20, 2004 at 04:00:47 PM EST

As a ten year old, I don't need to worry about this shit.

I bought this account on eBay

As far as I can tell (none / 1) (#3)
by grouse on Thu May 20, 2004 at 04:17:17 PM EST

There isn't anything that prevents you from deducting half of the property tax and mortgage interest as rental expenses, and the other half just as personal property tax and interest deductions.

See Pub 17. And an accountant, which I am not.

You sad bastard!

"Grouse please don't take this the wrong way... To be quite frank, you are throwing my inner Chi out of its harmonious balance with nature." -- Tex Bigballs

Sweet deal for you (none / 0) (#7)
by big fat idiot on Thu May 20, 2004 at 04:44:31 PM EST

Your friend helps pay your property taxes and mortgage interest (which are not living expenses, by the way, but rather expenses you have because you're investing in a condo) but doesn't get any ownership in your property. That's a really crappy way to treat someone you supposedly love. If you've already proposed this to her, I hope she's slapped you over it.

Splitting the other expenses should be fine, but unless something's changed about the tax code, I don't think either is tax deductible. At least not on your federal taxes. I could be wrong on condo fees, but I'm also positive that utilities aren't tax deductible unless you're talking about utility expenses for a property that you're renting out to others in which case the utility expense will be deducted from the rental income when determining how much of the rental income is taxable.

Simplest solution (none / 2) (#10)
by big fat idiot on Thu May 20, 2004 at 04:57:37 PM EST

Figure out what's fair for your girlfriend to pony up each month and declare that amount as miscellaneous other income on your 1040. If you keep good records you'll be able to deduct expenses (her half of the utilities, etc.) that you've paid out of pocket against that when you file. As long as you don't declare your mortgage expenses twice, I highly doubt that this approach would be illegal by any stretch of the imagination.

This sounds like a lot of work (none / 1) (#12)
by lakeland on Thu May 20, 2004 at 08:14:34 PM EST

For what is ultimately a tiny amount of tax. If I really wanted to do ths properly I'd imagine something like you subletting half to her, but it's going to get complicated fast and you'd need an accountant to set it up. The suggestion to just declare it as misc income seems fairly good to me -- it might mean you end up paying a little more tax than you should but not much. Otherwise, get an accountant who will probably laugh a bit but should be able to trivially sort it out.

Quick Update (none / 0) (#14)
by nine4mortal on Thu May 20, 2004 at 08:36:00 PM EST

I found this article at BankRate.com that suggests my dilemma may be a judgment call that is not easily answered.

[I]f your sons just took on roommates... that were allowed to use the home rent-free, then you wouldn't have the rental activity issue to deal with. Obviously, the roommates would make some sort of contribution to the household, such as food or utilities to justify their use of the property. However, what is not clear is if the Internal Revenue Service would try to recharacterize this as a rental activity and deem this other support as disguised rent. Your counter argument would be that the roommate relationship is not a business relationship and therefore should not be treated as a rental activity.

This seems to suggest that it may be a matter of keeping records and hoping that if I get audited the auditor likes the argument about a romantic relationship not being a business relationship. :)


"Nine for Mortal Men doomed to die..."

Renting part of a house can be a great deal... (none / 1) (#16)
by claes on Thu May 20, 2004 at 09:22:08 PM EST

Our house (like many where we live) had a small apartment in it. For years we rented it out, and it was a great deal, because we figured the rental unit took up 1/3 of the house, so 1/3 of the upkeep and maintainence of the house was a business expense and was subtracted directly from the rental income before figuring taxes.

We still took the entire mortgage deduction, although it seems to me this should have been cut back.

My brother-in-law rented out one floor of a big house and deducted HALF of everything.

But our renter moved out, and somehow our children expanded so we bashed a hole in the wall and now the entire house is filled with shit, and we get nothing but grief from our leeching children.

-- claes

Ask K5: Income Taxes on Shared Living Expenses | 22 comments (22 topical, 0 editorial, 0 hidden)
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