Rental Income and Child Support

So, the day has come to finally figure out how much your rental property income will affect your child support payment. You won’t be surprised that many states consider that pretty penny a critical component when calculating these payments.

As with any financial analysis, it’s essential to understand how to break down the numbers, especially regarding child support. In most cases, parental income is calculated in its entirety. You’re going to have to provide proof of all of your finances. For rental property owners, the court will pay particular attention to the total net income of your rental.

So, how is rental income calculated, and how does that play into child support payments? We’ll give you the low-down on figuring out your rental income so that you can prepare yourself somewhat for the road ahead.

What Gets Calculated in Child Support Payments

The main factor that gets calculated in child support payments is parental income—the total amount of any salary or wages. This salary includes both taxable and non-taxable income.

The formula for calculating child support payments can vary depending on your state. When determining gross income, many factors can come into play besides salary. These factors may include:

• Rental income
• Business income
• Work bonuses
• Pensions
• Investments

One thing to note is that many states allow for deductions from gross income for things like:

• Property taxes
• Union dues

Aside from monetary obligations, some states also factor in the following:

• How much time the child spends with each parent
• Costs associated with health insurance
• The age of the child
• Childcare costs

How To Calculate Rental Income For Child Support

If you’re wondering how to calculate total rental income for child support purposes, the payments are based on several factors, but in a nutshell, here are the top three steps that should take place.

Determine gross income

First, how much cash is the rental property bringing in? Let’s use $1,000 in rent for each month as an example. At the end of the year, we have a total of $12,000 in gross rental income. We’ll remember this number as we move on to the next step.

Factor In deductible expenses

Yes, you can factor expenses into the equation. To make things simple, let’s consider the following expenses:

• Rental property taxes: $500
• Repairs and maintenance costs: $1,000
• Utilities: $1,200
• Property management fees: $2,500

In this case, the total allowable expenses are $5,200. However, there are still some expenses associated with the property that you can deduct from your gross income, such as your mortgage’s tax and interest. Let’s hold on to that $5,200 as we move on to the next step.

Calculate net rental income

You want to deduct the total allowable expenses from the gross rental income to determine your net rental income. Based on the examples above, we would use the $12,000 gross rental income minus $5,200 of total allowable expenses, equaling $6,800 in net rental income. So, the $6,800 would be used in the calculation to determine the child support amount.

Remember that the amount of child support will vary based on your state. It’s always a good idea to consult with a family law attorney or child support professional for guidance on accurately calculating rental income and child support payments.

Check Your Local And State Laws

Child support will be calculated differently depending on the state where you live. Often, states will provide child support calculators, which are a great starting tool for those strictly looking for an estimation; these calculators tend not to get into the nitty-gritty of finances, however, as they don’t factor in your specific circumstances. When looking into your local and state laws, here are a few formulas or models that you might see:

The Income Shares Model

Forty-one states use the income shares model. So, think of this model as the financial life a child would receive had the parents stayed together. For this, you’ll use both parents’ incomes.

The Melson Formula

Three states use this model: Delaware, Hawaii, and Montana. Think of this as a more extreme version of the income shares model. This formula incorporates additional factors and expenses, many designed to consider parents’ financial needs.

The Percentage of Income Model

Last but not least, six states (Alaska, Mississippi, Nevada, North Dakota, Texas, and Wisconsin) use the percentage of income model. This is a flat or adjusted percentage of the non-custodial parent’s income.

Rental Income And Child Support Payments FAQs

Here are people’s top questions when calculating rental income and child support payments.

Does child support count as income for renting?

It depends. This is an ongoing debate amongst landlords because there is a risk of the recipient of the child support not being paid at all—it happens quite a bit.

If you are a landlord considering counting child support as income, you want to look at the things like the court order and when payments are received. When it comes down to it, let’s say that the child support income is less reliable than you initially thought, and you decide to evict a tenant and collect the balance due. Will the state allow you to garnish the amount as normal income?

Since the Internal Revenue Service (IRS) doesn’t consider child support taxable income, I would not consider it in the rent calculation unless you have a HUD-specific home.

According to hud.gov, “[rental property] owners must count alimony or child support amounts awarded by the court unless the applicant certifies that payments are not being made and that he or she has taken all reasonable legal actions to collect amounts due, including filing with the appropriate courts or agencies responsible for enforcing payment.”

So, does child support count as income for renting? It depends on the situation and, if not required, the risk the landlord is willing to take.

What income is counted for child support?

The income counted toward child support can exceed just your salary. In some cases, gross income can include recurring capital gains or unrealized income, winnings from a day of gambling, rental income, and sometimes even interest earned on retirement accounts. Typically, any additional income outside of salary is considered.

Sometimes if C-corporations or S-corporations hold your rental properties, the court may even decide that the retained earnings are subject to child support calculations. If, for some reason, you disagree with the court’s order, perhaps you think an income source shouldn’t have been included, you can elect to go to the court of appeals to review the record. The review is to see if a legal mistake was made and if that mistake affected the overall outcome of the trial court case.

Is money from rental properties considered income?

Sure is, but only the net income from a rental property. So, what does that mean? The term “rental income” doesn’t necessarily mean you go off the total amount of rent payments coming in. You can deduct allowable property expenses from that amount, which will help you calculate net rental income.

This is because the “cash flow” is the amount received in rent minus what is being paid out, including the interest part of the mortgage payment, property taxes, insurance, and maintenance costs. Not all things you consider an expense are honored by the court.

For example, in a Colorado Court of Appeals case, “the trial court found that the principal portion of the mortgage payments did not qualify as ordinary and necessary expenses for purposes of calculating child support.”

It’s All In The Numbers

According to the Census Bureau, “Parents who received regular child support payments received a monthly average of $604 and a monthly median of $396 in 2017.” Although there hasn’t been substantial growth in the average year after year, the number does seem to increase continuously.

If you own a rental property and, for whatever reason, are going your separate ways with a spouse, make sure you truly pay attention to all of the numbers, especially your total allowable expenses. Those expenses are crucial in determining your overall rental income and the amount calculated into a child support payment.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.