Do You Need to Claim Income Earned From Renting Out a Room in Your Home in the United States?

If you’re looking for a way to generate some extra income without investing any cash or adding extra hours at a job, renting a room in your home could be the plan for you. To avoid any problems at tax time, prepare to report all the rent you collect. You can deduct expenses associated with the part of your home that’s rented. This helps you limit the tax bite.

Direct Expenses

Some examples of these tax-deductible expenses are the costs to paint the room or repair a closet door in the room. You can also deduct the cost of adding a rider to your homeowner’s insurance for additional liability protection related to having a tenant. The cost for a second phone line in the room used only by the renter is fully tax-deductible. You can even claim depreciation expense for furnishings you provide in the rented room. Keep track of expenses that are directly associated with the rented room.

Divided Expenses

Divide expenses paid for your entire home according to the percentages of rented space and personal-use space. Common methods of dividing expenses consider square footage or the number of rooms. For example, if the rented room is 5 percent of your entire home, then you allocate that percentage of housing costs to rental expense categories. Some of the category types are mortgage interest, real estate taxes, and utilities. Don’t deduct the cost of your regular home phone even if your tenant is allowed unlimited use.

Not Rented for Profit

The Internal Revenue Service presumes that you are trying to profit from a rental when the income exceeds expenses for three out of five consecutive years. If you rent a room for less than fair value, the IRS might decide that you are trying to create losses to offset taxable income from other sources. When renting a room without expectation of profit, deductible expenses are limited to the amount of rental income. Then, you can’t use Schedule E and deduct a loss or carry forward rental expenses that exceed rental income.

Special Rule

If you rent a room in your home for a limited time, such as during a local event, you might escape having to report rental income. When you rent a room for less than 15 days during the year, you don’t claim the rental income on your tax return. Instead, the income is tax free and you treat your entire home as a personal residence. You also don’t calculate and deduct any rental expenses. You can still deduct real estate taxes and mortgage interest on Schedule A if you itemize deductions.

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