Thoughts on having a roommate in your own house? (1 Viewer)

[DaveF]

I'm thinking about getting a roommate. Not a big deal? Well, it's for the house that I own, which is new all around for me. Aside from the finding of a good roommate, I'm wondering how formal to be with the process, particularly whether I need an actual rental / lease agreement?

I own Pacific Heights[/url], so I know just badly this could go but the reaction from a few people so far, including my house-closing lawyer, was that a lease is overkill.

I will also be paying taxes on the income from renting (my dad is my accountant, who also worked for the Feds for 25 years, and I can't do it under the table). Any experience with minimizing the tax burden for rental

Any stories, good or bad, about renting propery you own? Or just interesting roommate anecdotes?

 

[Kirk Gunn]

I've had very good luck in the past (way past) with roomates, but they weren't in property I owned. Granted, I had a few boneheads also, but I purged them from RAM.

I believe if you are the property owner of a single family home, and are residing in the premises, you have much greater leeway in choosing a renter, then dissolving the rental agreement if things "go south" in a bad way. I don't believe "equal opportunity, etc" play a role.

A consultation with a real estate attorney may be in order to confirm this for your area. Good luck, I'm sure the extra income will be nice !

 

[Patrick Sun]

I think it depends where you are in your life.

When I bought my house, one of my co-worker who travelled alot was looking to lessen his rental costs, and I thought the extra money would be nice to have in the beginning as the mortgage payments were coming due, so I was okay with a roommate, but then roommate re-located out of the state, and I decided I was done with roommates. I like not having to put up with anyone else's crap when I'm home, so I've opted to stay away from a roommate situation, and after re-financing my mortgage a few years ago, my peace of mind was worth more to me than the extra amount I had to cover without the renter's income I was receiving when the roommate was living with me.

So, it depends on whether the extra money you get is worth the hassle of dealing with another person in your own home.

I know some home owners who have roommates, and it works out well for them, so the social dynamic has to be a good one for it to work in the long term.

 

[Andrew W]

Perhaps you could reduce rental income by asking the roomate to pay all the bills and give him an appropriate adjustment on the rent.

 

[Mark Sherman]

I'm thinking about doing the same when I move ino the house I just bought. Lay down the ground rules and what you expect out of him/her. If they dont comply to the rules that you set......SEEYA.......TIME TO GO.

 

[Jason Kirkpatri]

One thing to consider is that NOBODY will be as anal as you will be when it comes to your house (especially since it's brand new).

If you find that little things get to you, a roommate might push you over the edge. Those crumbs on the counter, the hair on the bathroom floor, the dishes in the sink, the noise late at night, the refusal to help with the yard work, the roommates weird friends, the lack of dusting, the inattentiveness to general cleanliness, the constant talking on the phone, the inability to take out the garbage, the "borrowing" of food (yes, I'm talking from experience ).

If you can handle it, awesome. Being a brand new house, I dunno'...

 

[DaveF]

An option others have suggested. I need to give it some thought.

 

[Jeff Ulmer]

This is illegal (tax evasion) if you are not declaring the money being given for these expenses. Having a renter pay the bills is the same as taking the money and paying it yourself from an IRS perspective.

On the plus side, you should be able to deduct interest on your mortgage, part of any non-capital expenses (carpets, paint, fixtures, decorating), etc. Talk with your accountant about what you can and can't deduct.

Personally, I would prefer not to have a renter, unless your house is set up so you can get completely away from each other when necessary (and it will be necessary). There should be some form of agreement, otherwise you may find (among other things) the rent isn't paid on time, living arrangements change (ie someone else moves in or becomes a permanent guest) etc. You want an easy way out of the living arrangement if it becomes unmanageable.

You should also inquire with your insurance company, since you will at the very least need additional liability, and your premiums may increase due to an increased security/damage potential.

Having extra money for expenses is good. Winding up having another person interfering with your social life in your own home isn't.

 

[DaveF]

Hadn't thought of that. Thanks for the other insights.

I've had very good roommates over the years, and I'm generally looking within a "select" group of people with whom I've had good experience (friends of friends and graduate students), to mitigate the risk of a bad apple.

 

[Ted Lee]

as already mentioned, the interview process is key. i'm talking get down and dirty, ask very personal questions, etc.

you'll want to know if they're druggies, sex-freaks, or total slobs. what kind of tv do they watch, what kind of music do they like, what are their sleeping habits, etc.

after all, knowing if your roomate is going to be bringing home s&m couples on a weekly basis could be key to your sanity ...

unless you're into that kind of thing dave ...

 

[Greg_R]

Even if the renter is your best friend, be sure to be very formal with the lease agreement. Write up a contract and have both parties sign it. This should list expectations, cost of rent, etc. You don't need to get a lawyer for this...

 

[DaveF]

Called the insurance company, and my policy is unaffected by a roommate.

I'm starting to think of this more carefully. Any more suggestions on how to effectively interview a potential roommate?

I need to learn more about leases.

 

[Patrick Sun]

Fart in their presence, and see how they react.

 

[DaveF]

Sounds like quite the house you're getting! I've got a bog-standard colonial, so the bedrooms provide the separate spaces, but the living areas would be shared. Had I gotten a townhome I'd also considered, it would have allowed even more separation. Oh well, live and learn.

I still need to learn if this guy is a good match for me, or if he would be a "weird friend." But so far, he's interested and I'm interested, so it may work well. The best thing would be finding a roommate at about my desired rate with no effort.

 

[JonZ]

Ive lived with friends before and it didnt work out.

If you do make sure its someone you know wont cause you problems, who will clean up after themselves and such.

I live with my brother now and it works fine, becuase were so much alike.Share the cooking, share the cleaning,etc.

I came home yesterday and he was mowing the lawn.

 

[DaveF]

The tax impact of renting is frustrating me! I have to pay taxes on the rental income, which dramatically lowers what I will make. Now, I can depreciate my house to offset the tax burden. But, I've just learned that I then pay taxes on the depreciated amount when I (eventually) sell the house. So, not much net gain, in the long run. (mumble grumble)

 

[Jeff Ulmer]

You do NOT want to deduct the house, since the tax ramifications can be huge - you could wind up paying tax on tens of thousands of dollars when you sell.

Are you not allowed to deduct part of your mortgage interest where you are? You should also be allowed to deduct non capital expenses as I mentioned earlier (ie cosmetic things, faucets, but not plumbing, drywall, but not framing, outlets/lights but not wiring etc., maintenance and services) without the capital tax penalty. You should also be able to deduct a portion of your utilities and property taxes, since these are all legitimate expenses necessary to run your "business."

 

[DaveF]

Yes, that's allowed for State (along with Federal). Likewise for property taxes; there's no additional write off by having a renter.

I was looking for means to mitigate the tax burden on rental income. I anticipate miscellaneous expenses to be be minimal. This house is new construction and needs no work -- unless I can write off the installation of AC, the driveway, and a deck. I need to find out if I can depreciate my appliances. That would help a small bit, if so.

I need to talk to my dad about the impact of depreciating the house. He's a tax specialist, but I don't know if he has much experience with real estate specifically.

 

[Jeff Ulmer]

I see. We have no deduction for interest or property taxes here, unless the house is being used for business (including rental), so that is a HUGE disadvantage for you.

Likewise, writing off capital costs is a bad idea here, since you will pay tax on any profit on the property when it sells, which could be tens to hundreds of thousands, when the initial writeoff, by comparison, is minimal.

I guess you'll need to weigh the benefit of having some extra cash coming in with the tax implications and potential headaches of having a roommate. At least your insurance isn't going to cost you more.

 

[DaveF]

A great allure of home-ownership in the U.S. is the tax benefit of deducting mortgage interest and property taxes.

Renting a room out, I believe all the deductions still apply, though they are shuffled around in the various tax forms.

I need to check, but I no longer think this is a problem. Capital gains up to $250k are exempt from Federal taxes if from sale of the principal residence, lived in at least 2 years. Depreciating would effectively decrease the $250k cap, but in my market, I will never hit that cap.

But I need to check with my accountant to verify.

(The taxes are so complex that it's tempted to dodge just to make life simpler.)

I picked up the "Dummies" book on rental properties; it's got a few tidbits relevant to my situation, including a sample lease agreement that I can modify for my use.