Tax Implications of Renting out a Room in Your Home
With the advent of vacation rental sites like Airbnb.com, many homeowners are jumping on the room rental bandwagon to earn a few extra bucks. But as with everything money-related, there are, of course, both federal and state tax implications when you rent a room in your home, either as short-term vacation get-away or to someone who will live there for months or possibly years.
If you rent out a room in your home, the same tax rules apply to you as they do for landlords who rent out entire properties. All of the rent received is considered taxable income and must be reported to the IRS. But, as a landlord, you are allowed a number of deductions that enable you to completely or partially offset this rental income. There is one caveat: if the room you rent is part of your primary residence, you can only deduct expenses that pertain to the portion that is rented. For example, if you cover water and garbage for your renter, you cannot deduct the entire amount of these utilities but only the portion that relates to the rented section. Basically, you need to treat the rented portion and the area in which you reside as if they were two separate properties.
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You can deduct one hundred percent (or depreciate, where applicable) any expenses incurred specifically for the rented space. If you’ve repaired or replaced a window in the room, installed carpet or other flooring, painted, updated light fixtures, added closet organizers or provided your renter with furnishings, these are all fully deductible. In addition, if you pay extra homeowners insurance premiums because you’re renting out a room, the full cost of this supplementary premium is considered a deductible operating expense. If you install a second phone line just for your tenant’s use, the full cost is deductible as a rental expense (the cost of the first phone line is not deductible even if your tenant has unlimited use). You can also deduct depreciation on the section of your home that is rented.
Expenses incurred for your entire home must be divided between the section that is rented and the area in which you live.
This includes:
- Mortgage interest
- Repairs for your entire home such as painting the entire home, repairing the roof or furnace, or fixing plumbing or electrical
- Home improvements including replacing the roof, adding solar panels, landscaping, upgrading electrical or plumbing
- Homeowners’ insurance
- Utilities such as electricity and gas
- House, carpet or window cleaning or gardening services for your whole home
- Garbage service
- Water service
- Security system costs
- Home Owners Association fees
Methods for Dividing Expenses
You can use any reasonable method to determine how to best divide these expenses. It may make sense to divide the cost of some items (water, garbage, etc.) based on the number of people using them.
The two most common methods for dividing an expense are based on the number of rooms in your home or on the square footage.
Number of Rooms
Say your home has five rooms that are approximately equal in size and you are renting one room. That means one-fifth, or 20%, of your home is being rented. You can deduct 20% of your expenses that must be divided between rental and personal use.
Square Footage
You rent a 10 x 20 square foot room in your home. The room is 200 square feet and your entire house is 1,200 square feet of livable space. The rental portion equates to one-sixth, or 16.67%, of your home. That means you can deduct as a rental expense one-sixth of any expense that must be divided between rental use and personal use.
It is helpful to determine in advance which formula is more financially beneficial. The room method often provides a larger deduction than square footage.
The only exception to the above is if you rent a room in your home for less than 15 days a year and you also use that same room yourself during other times of the year.
Whichever method you choose, be sure to keep excellent records of your deductions and expenses when you rent out a room. It is also wise to consult your financial advisor in advance to ensure you have a complete understanding of the tax repercussions based on your unique situation.
The IRS website has more information on renting a room in your home.
