In 2009 I bought a small (850 sq ft) home via an FHA loan as a first time home buyer. Later, In 2013 I had a crazy month in which I accepted an out-of-state job and immediately learned my marriage was over. I decided the change of venue would be good, so I went ahead with the new job, changed my home insurance to a landlord policy and moved out of state. At that time I was unprepared for the move and left a fair amount of property behind. About 6 months later, I allowed a friend to move into my vacant home; for him it was a cheap, flexible arrangement that allowed him to improve his finances, and for me, I gained a caretaker for my asset and a small rent. He pays me like a roommate would, covering a little over half of the mortgage payment.

We've had this arrangement for about 2 years. I'm sure I'm square with the insurance (landlord policy), and my state/county (MO/Greene) doesn't differentiate between owner-occupied or not...residential is taxed one way, commercial is another. I've called and confirmed this. Additionally, I've been told by my lender and I've also read that my mortgage allows me to rent the home after I lived in it for the requisite amount of time, which I have. So I'm relatively sure my arrangement is in compliance.

That brings me to now. Over time, I made enough small improvements to the house to form an opinion that it is in bad shape and needs work.

Some examples. 1) It has three layers of shingles..! 2) It needs the electrical panel updated, which will require moving the weather head! 3) There is evidence of some settling---partly due to the weight of three layers of shingles I'm sure---and I suspect it requires foundation maintenance, hopefully just five or six well-placed screw jacks, but possibly worse. Finally, if foundation work fixes some off-level areas, 4) it'll need a new front door as it's been hacked to accommodate the wonky frame. I'm sure foundation work will result in a bunch of small issues too...drywall seam cracks, grout cracks, painting, etc.

While I would honestly prefer to sell it and be done, let's assume that's not on the table...if for no other reason, I'm not ready to make my friend homeless.

So my question is, should I discontinue treating this as a personal asset and begin treating it as an investment property? (Would it be a problem that my friend couldn't pay a fair market rent?)

If it matters, my loan was for 62k; the home is valued at 59,5, and I'm at 49720 remaining on the note.

I'm afraid the cost of work it requires is ridiculous compared to the value of the property, but unlike a worn out car, you can't just scrap it and walk away. If converting it to a true rental isn't my best option, I'd appreciate any alternative ideas I haven't considered.

  • 1
    Does the friend do enough to improve the property that you could justify "paying" him a caretaker's salary (to cover the difference in rent from fair-market)? And how have you been treating the money the friend has been paying you so far? Finally, am I correct to believe you officially reside in another location (i.e., your principle residence according to your 1040 is not in Missouri)?
    – Joe
    Commented Dec 2, 2016 at 22:30
  • What does it mean to "begin treating it as an investment property?" What would change?
    – Brythan
    Commented Dec 2, 2016 at 22:47
  • Thanks @Joe, answers to your questions: 1. (caretaker) nope..."roommate" is a better comparison on a financial level. 2. I put the money he pays in savings, presumably to cover future maintenance issues (like a roof, heater failing, etc). Occasionally I need it to make ends meet, but I think I've saved 2/3's of what he's paid. 3. Yes, I rent an apartment in South Carolina.
    – elrobis
    Commented Dec 2, 2016 at 23:19
  • How do you treat it, as in, for tax purposes. Is it treated as income?
    – Joe
    Commented Dec 2, 2016 at 23:20
  • @Brythan...my impression is handling the taxes is completely different for an investment property. For instance I could utilize depreciation, and I could "expense" major repairs...correct? As it stands, I just take a standard deduction (mortgage interest doesn't get me over the 6k mark).
    – elrobis
    Commented Dec 2, 2016 at 23:21

2 Answers 2


I think you may have a significant misunderstanding here. You have been renting your property out for two years, now. There is no special "roommate" clause in the tax code; roommates are renters, and the rent they pay is rental income. (If they were roommates in a property you both rented from a third party, that would be different.)

See publication 527, chapter 4 for more details on the subject (search on "Renting Part of Property"). You should be:

  1. Declaring the rent you received from your roommate as rental income
  2. Determining what portion of the use of the house your roommate had (i.e., if you were true roommates, you might each have 50% of the house, so 50% would be his)
  3. Dividing expenses based on (2). Again, if you are proper roommates you would probably split things like heating by 50%, half goes towards rental expenses, half goes to normal (non-deductible) expenses.

You may also consider "Not renting for profit" section, which may be closer to what you're actually thinking - of changing from "Renting not for profit" to "Renting for profit". Not rented for profit means you can report on your 1040 as opposed to filing Schedule E, but it does mean you have to actually not make a profit (and remember, some of the money that goes to paying the mortgage is not deductible on this side of things since it's your property and you'll get that money back, presumably, when you sell it).

If that is what you're asking about, it sounds like it's just a matter of money. Are you going to start making money? Or, are you going to start making enough significant upgrades/etc. to justify the tax deduction? You should consider the actual, specific numbers carefully, probably with the help of a CPA who is familiar with this sort of situation, and then make the decision that gives you the best outcome (keeping in mind that there may be long-term impacts of switching from not-for-profit to for-profit rental treatment).

  • Hmm...Some of what I read discussing income/rental property vs. property for personal use made a distinction between the two via operating behaviors, like whether I had advertised or not, of which I've demonstrated none. That is, I know him and we have a personal arrangement. However I take your point on claiming the "income" and differentiating percentages of use, based on the language you cited. ....but that seems waaaaaaaay more complicated than it needs to be over a matter of $3600.
    – elrobis
    Commented Dec 3, 2016 at 0:21
  • Also...it just occurred to me. What would have been the property's status if he had never moved in to begin with, and it was just sitting there empty?
    – elrobis
    Commented Dec 3, 2016 at 0:23

I don't have a direct answer for you, but here are some other things you might consider to help you decide on a course of action in addition to Joe's note about consulting a CPA...

Get a couple contractors out to look the place over and give you some quotes on the work needed, most will do so for free, or a nominal fee. Everything about the extent and cost of repairs is complete guess work until you have some firm numbers.

You might also consider getting an up-to-date appraisal, particularly if you can find someone willing to give you an "after improvements" estimate as well. The housing market has fluctuated a bunch in the last couple years, your current value may have shifted significantly from where you think it is if you haven't done one recently. You will definitely have to pay for this service, I would estimate around $500 based on one I got in St Louis a few months ago.

You might also consider reaching out to a local property management company to find out where they think you would fall in the scope of the current rental market and what improvements they would recommend.

You will probably want to be onsite to talk to any of the above people about the work they are proposing, and your intended goals, so figure some travel costs and time into your evaluation.

As one of your noted concerns was the state of the roof, I can tell you that in St Louis County, and the spec sheet for most shingle manufacturers, you are limited to two layers of shingles, then the roof is supposed to be stripped and redone from the bare wood. Personally, I won't even do the second layer, I always go to bare wood and start over, if for no other reason than it gives me an opportunity to inspect the deck and deal with any minor problem areas before they become big problems. I don't know Greene County to know what the local code may be like, but odds are high that the shingle manufacture would not honor any warranty with this installation.

Another potential gotcha that may be lurking out there is your ex may still have a lingering claim to the home if you go to sell it. I don't know the rules in Missouri off hand, but where I grew up (with family in the real estate and title insurance businesses) there was a law regarding homestead rights. If a spouse spent even one night in a property, they had an interest in it and an explicit waiver had to be signed to release said interest. Review your divorce settlement and/or contact your attorney to confirm your status in this regard.

Also consider the potential of refinancing your mortgage to either reduce the payment, or get funds for the improvements/repairs.

Final note, I understand wanting to help out a friend (I have done similar things more times than I can count), but seriously look at the situation and see if you can't get the rent or other compensation up to the level of the mortgage at least.

You mentioned that you have belongings still on the property, what would a storage unit for said items cost? In terms of juggling the numbers you could potentially use that value as justification to adjust the friends rent as a caretaker fee without any issue. (Verify with your CPA)

Talk to the friend and see if there are other parts of the job they would be willing and able to take on as consideration for the reduced rent (make sure you have at least a simple contract on any such agreement).

Or if none of the above are sufficient to balance the numbers, see if they would be willing to take on an actual room mate to help make up the difference.

  • Thank you, I appreciate your input on this, especially since you have experience with the locale. (I was aware of the 2 shingle layers code, but if I started listing the code violations and odd things I found along the way the overkill would have been worse!) I'll just say this...if I would have checked the permit history before I bought the house, I would have had a serious negotiating position. I wish I knew then what I know now. :/
    – elrobis
    Commented Dec 3, 2016 at 1:27

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