Reporting income from renting guest house on property of primary residence

[oldsalt]

My wife and I have purchased a home this year. Part of the purchase included a guest house in the back yard. Our daughter lives there with her 2 children and is paying a small amount of rent. How is that income to be reported, and what, if any, deductions are allowed? Is schedule E an appropriate method? This seems akin to renting out a room in your own home, but I am at a loss as to the proper method of reporting this income. Any help would be appreciated.

 

[wowie]

I am not an attorney and not a CPA.

Is your daughter under 24 and in school at least part time and unmarried? If so, you can claim her as a dependant and the money exchange is just between you guys.

Or, are the grandchildren adopted by you or are you paying more than 50% of their necessary support (food, clothin, medicine, housing) You can estimate how much you would rent the house our for and assume that you are "paying" the difference between what your daughter is paying. In exchange for the added income, you might be able to claim one or both of the grandchildren as dependants. . they are living with you technically.

If you do choose to claim it as a rental property, you will need to report the asset value along with depreciation and the income that you receive from its rental. However, you can deduct any maintenance that you do to it. Since I do not know your whole situation, I would highly advise seeing a CPA in privat practice. He/she would be able to know your info more intimately and would be able to give you more sitiation-appropriate advice. This is definitely a sitation that I would spend the extra money to have a professional fill out you return because you don't want a visit from the IRS. . .

 

[oldsalt]

Thank you very much for the information. I am a retired enlisted man from the Navy, so, as you can imagine, am on a pretty fixed, limited income. In fact, we bought this place solely because our daughter and her kids came to live with us. If at all possible, I'd like to do this on my own. I think I can muddle through the Schedule E, but I get stumped on computing depreciation. Is there a formula for computing it(one that a reasonably intelligent guy could understand without a math degree)? And since the rental property is a part of my residence, should I take only a percentage of the depreciation and apply it? I know that these are questions for a CPA, but the cost of using one would almost certainly wipe out any refund I might have expected.

 

[wowie]

Yes, I know how fixed the income for a retired enlisted person goes. . . my hubby is active USMC (only slightly better pay than retired )

Anyway, I really am not a CPA, and I have not done much preparation of schedules, that is mainly CPA work because of the depreciation. Do you use Quicken at home? If so, you can usually buy Turbo Tax for home and it will walk you through most of the return including posting the entries that you made for the checks that you wrote and the interest that you paid on a mortgage (if you are tracking those things within Quicken). Turbo tax is pretty reasonably priced AND if you buy or have Quicken you usually get a drastic price reduction on it. However, you can get yourself into trouble buy having just enough rope to hang yourself so to speak.

As for seeing a CPA. . . you would be surprised as to how reasonable it is. My dad runs a small CPA business in Ohio and for your return he would probably charge about $200 for federal, state, and one local return DEPENDING on how many other schedules you had. If you don't have any investments then it is lower, no personal business then it is lower, etc. Another thing to this about is that if you are close to ANY military base they will help you to prepare your return for free. You might consider calling a local base or your last duty station to clarify these tricky questions.

As for the dependants. . .I would ask your daughter if you can claim her as a dependant as well as her children. She will still file a return, but she will not claim the personal expemtion or the exemption for her children.

Depreciation. . . yes there is a formula, I don't know it. . sorry. There should be instructions in the 1040 package that you get in the mail or pick up at the library. But yes, you should include whatever percentage of your residence is the land associated with the guest house and the guest house itself. Again, more of a CPA question. Keep in mind that you can expense the utilities, telephone, landscaping, plumbing, etc for the guest house since you are claiming the income.

To be honest, if I were you, I would consider not making this a rental property unless you are planning to rent it in the future to someone other than your daughter. There is very little benefit unless you have done A LOT of fixing up. And even then, when you sell the house you will have to count the proceeds as income for yourself. If you are staying there until you die, then your estate will have to do the same thing. Sorry for the LENGTHY response, but I hope that I gave you some useful info.