Rental Income & Family Support

Rent is Income Under Colorado Law

Rent is taxable income – see IRS Publication 527.

And given that Colorado domestic relations law has an expansive definition of income for purposes of child support and alimony, it will come as no surprise that “rents” are included as income for purposes of both child support (C.R.S. 14-10-115(5)(a)(I)(J)) and spousal maintenance (C.R.S. 14-10-114(8)(a)(I)(J)).

Net Rental Income & Rental Expenses

Not every dollar of gross rent received will be regarded as income, however, because there are expenses connected with earning that rent. As with any business income, the law provides for a deduction of the “ordinary and necessary expenses… required to produce such income.” (C.R.S. 14-10-114(8)(a)(III)(A) (maintenance) and (C.R.S. 14-10-115(5)(c)(III)(A) (child support).

Deduct Ordinary and Necessary Expenses From Rent Income

What are these expenses? A good starting point would be to look at IRS Form 1040, Schedule E, which sets out what the IRS will allow as deductions. Deductible expenses include such items as:

• Advertising
• Cleaning
• Insurance
• Property management fees
• Mortgage interest
• Repairs
• Utilities
• Depreciation
• Taxes

Mortgage Principal Repayment Not Deductible Expense

Note one item missing from the list above? Mortgage principal. Most mortgage payments consist of PITI, or Principal, Interest, Taxes and Insurance. The interest, taxes and insurance are all legitimate expenses, but not the mortgage. Why not? Because paying down a loan is tantamount to investing funds – the principal repayment increases one’s net worth, and therefore the balance sheet, so is not an expense. Note, however, that this view is not universally held among the 4th judicial district bench, and the undersigned has seen cases where a judge will deduct the entire rental payment, including the portion repaying the loan principal.

Depreciation May Be Deductible Expense

Can I deduct depreciation from rent income? Depreciation comes in two forms:

• Straight-Line Depreciation, which means as an asset is expended or declines in value over time, it is depreciated (and the cost deducted) over the same period of time.
• Accelerated Depreciation, which means deducting as an expense depreciation at a higher rate than that normally assigned to cover use and exhaustion.

The IRS allows a deduction for depreciation as a business expense (see IRS Publication 946.), but in many cases, it’s a somewhat fictitious expense – there’s no actual outlay, but over time as the asset is depleted, that depletion may be written off.

However, while the IRS allows accelerated depreciation to be deducted in some circumstances, Colorado law prohibits the accelerated component from being deducted:

“‘Ordinary and necessary expenses’ does not include amounts allowable by the internal revenue service for the accelerated component of depreciation expenses or investment tax credits or any other business expenses determined by the court to be inappropriate for determining gross income for purposes of calculating child support.”

C.R.S. 14-10-115(5)(a)(III)(B) for child support, or identical language in the maintenance statute, C.R.S. 14-10-115(8)(a)(III)(B).

In the 1990s, the Colorado Court of Appeals held that depreciation in excess of the actual real estate income could not be deducted. In Eaton, the Court was not persuaded by the fact that the IRS would allow such accounting: “The fact that certain items may be deductible on a party’s federal income tax return does not require exclusion from gross income under the child support guideline.” Eaton, at p.60.

But in 2022, the Court of Appeals held that the exclusion of depreciation as a business expense only applied to (1) accelerated depreciation, as provided for in the statute quoted above, and (2) any depreciation in excess of the actual rental income. Schaefer, ¶ 1. The implication of this holding is that “straight-line” depreciation should be deductible as a business expense from rental income. For a more detailed discussion of the Schaefer case, see our blog post on depreciation and rental income.

Rent from a Roommate or Subtenant

A trickier situation arises when a person has a subtenant or roommate living in his/her house who is paying rent. Strictly speaking, such rent is income, but how about if both tenants are co-tenants, on the lease, and paying the landlord directly?

In Cropper, a parent rented out his basement and tried to offset the rent received by crediting a proportional part of the expenses of his house – mortgage payments, utilities, etc, towards the rent. The trial judge rejected this, saying: “It is not at all clear to me what additional expenses above and beyond the ordinary expense of having a home in the first place are incurred by having a renter.” The Court of Appeals upheld that decision, reasoning that the utility expenses were not required costs for the rental income (presumably because they were living costs).

Subtenant rent is a gray area, and judges with the same fact situation could find a subtenant to be simply sharing of expenses, or income for purposes of child support and alimony. One court’s “reduction of living expenses” may be another court’s “income”.

Impute Rent from Non-Paying Roommate?

A father let his girlfriend and her children share his house rent-free, though she paid utilities. The trial judge found he was voluntarily foregoing rent he could have received, and imputed $1500/mo of rental income to the father. The Court of Appeals, finding this was a case of first impression, reversed: “By imputing rental income to husband, the court effectively recharacterized husband’s home from a primary residence to an income-producing rental property. This was, in our view, an abuse of discretion.” Gibbs, ¶ 22.

Note, however, that the court did not reject all possible imputation of rental income, just in situations where someone is sharing a primary residence that has not historically earned rental income. For a more detailed discussion of Gibbs, see our blog post on imputed rental income & divorce.

Rental Income on Separate Property is Marital Property

If a spouse owned a rental property before marriage which is rented out during the marriage, are the rents received marital income? Yes. Though the house may be separate property, as with any other separate property, the income earned during the marriage is marital property.

A spouse who collected rent during the marriage on his premarital rental property used the rent to pay down the mortgage principal, and upon divorce tried to argue that the rent received was not marital, so the increased equity should be his. The Colorado Court of Appeals rejected that argument:

“We are not persuaded otherwise by husband’s contention that the decrease in debt should not have been considered because he used rental income from the property to pay down the mortgage. Income earned from separate property during the marriage is marital property. Thus, the rental income that husband used to pay down the mortgage was marital income, and the trial court did not abuse its discretion by considering the mortgage reduction.”

Cardona, at 522 (rev’d on other grounds 2014 CO 3) (Cleaned Up).