Tax Implications of Renting a Room in my house when selling

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baseball2horse
Posts: 15
Joined: Wed May 09, 2018 1:38 pm

Tax Implications of Renting a Room in my house when selling

Post by baseball2horse » Wed Jul 25, 2018 1:47 pm

Hello,

I am considering renting out one or two rooms in my house, but want to make sure I understand the tax implications before I do so. In particular I am concerned about depreciation recapture and the capital gains exclusion when I eventually sell it.

From what I've read and understood, the depreciation recapture is taxed at 25% the amount you should've taken for depreciation whether or not you actually take it. This is a bad deal to me because my marginal tax rate is only 22% (could maybe get pushed to 24% with rental income but probably not) So right off the bat I have to pay 3% more in taxes when I sell then I would save

Further looking at the capital gain exclusion, it only applies to qualified use with the percentage of non-qualified being taxed at normal long term capital gains rate. So by renting out a room a portion of the capital gain will get taxed. Ie. If I rent two thirds of my house for three years, and then just live there myself for the next two I would get taxed on 40% of the capital gains.

I live in a HCOL area that is expected to continue to see rapidly rising home prices so I am concerned that the tax on that 40% of gain plus depreciation recapture tax could potentially be more then what I would make in rental income, or would cut into the profits so much as to not be worth the headache of being a landlord.</t>

I know that mortgage interest deductions can also be taken, bu those can be taken regardless of whether or not the property gets rented so that's a wash. I also can't imagine that maintenance deductions would make much a dent, or would get balanced out by the additional required maintenance on the house and the fact that having more people in the house would make my home insurance go up.

Running basic numbers with just accounting for deprecation deduction/recapture, capital gains tax and income taxes, renting it for three years and selling after 5 has over half of the money taken in going to paying taxes.

The other thing I'm really struggling to find is information about state taxes. I live in Colorado which has a flat tax for income tax and capital gain, but I can't find anything useful about housing exceptions, so haven't been able to consider the effect renting would have on selling taxes.

Am I missing any other considerations? What things to other people consider before renting out a room?

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