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Now, the question - should I report this as rental income?

Yes, this would be rental income. You should report all of your income from whatever sources it is derived. Any exceptions to this would be somewhere in the tax code. The only exception I know of for your principal residence would be a short-term rental of 14 days or less.

Be aware that not everyone reports all of the income that they should. (Wink, wink, nudge, nudge). Also be aware that the only crime some mob bosses have done time for is for tax evasion. (Notably, Al Capone.)

Or, more specifically, if I report it or not, what about the following:

1) What impact does this have on my mortgage? I know there's a distinction between primary-residence and investment-property; is there any negative side effect of blurring the line, ie "whoops, my note's due now" or "whoops, my rate just jumped .75%?


I'll leave that one to the folks on the real estate investing board. I suspect the cure for any default would be that you loan becomes due. I doubt that they would (or even could) simply raise your interest rate.

2) What is the impact of selling the home in the future? Again, I'll be living there, but it would also be a rental property.

This one is still a bit new (and I rarely deal with it professionally) so correct me gently if I'm wrong.

I believe the only impact would be from the depreciation you take (or should have taken) while renting the house. That depreciation would not be subject to the $250k ($500k for marrieds) exclusion from income. It would be taxed at a 25% rate.

3) What is the impact of this on investing in real estate in the future? I've read that unless you have previous landlord experience, you might have trouble getting a rental-property mortgage, since they won't allow you to show theoretical rental income when you apply. Would having a year's worth of documented rental income help later on?

That's definitely one for the mortgage pros. I won't even hazard a guess here.

4) What is the impact of this on deducting mortgage interest come tax season?

Pretty simple. You need to split your mortgage interest between the residence portion and the rental portion. One way would be to base the split on the square feet you rent out compared to the total square footage of the house. Common areas (kitchen, living room, etc.) could be split 50/50 if the rental includes their use.

Once you've determined the split, you report the residence portion on schedule A and the rental portion on schedule E. You would do the same with property taxes.

5) What is the impact of this on deducting home maintenance come tax season? I believe you can deduct a number of things on a rental property, again, the line seems blurred, since I'll still be living there.

You've got the same split issues as with the mortgage interest. But once split, the residence portion is not deductible, while the rental portion would go on schedule E. Utilities would be included in the maintenance expenses.

Since a portion of most of your maintenance expenses will be deductible, you'll want to keep track of them so you can properly claim them at tax time.

--Peter
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