Thinking about renting out a spare bedroom? Whether you’re offsetting your mortgage or taking advantage of a hot rental market, it’s smart to understand how the IRS views that income and what expenses you can deduct.
Let’s break it down.
1. Rental Income Is Taxable
If you rent out a bedroom in your primary home, the rent you receive counts as taxable income. You’ll report it on Schedule E (Supplemental Income and Loss) with your federal return.
The good news: you can also deduct a portion of your home expenses to offset that income.
2. What You Can Deduct
When you rent out only part of your home, you can deduct expenses that relate to the rented space. These typically include:
- Mortgage interest (the rental share)
- Property taxes
- Homeowners insurance
- Utilities like water, gas, and electricity
- Internet service
- Maintenance and repairs
- Depreciation on the rented portion of the home
Since you’re renting just one room, you’ll need to allocate expenses between personal and rental use. The most common method is by square footage.
Example:
If your home is 2,000 square feet and you rent out a 400-square-foot bedroom, 20% of your shared expenses may be deductible.
Need help planning for these deductions?
3. Exclusive vs. Shared Expenses
Expenses that benefit only the rented space, say, repainting the tenant’s bedroom or replacing its carpet, are 100% deductible.
Shared expenses, like a new roof, utilities, or landscaping, are partially deductible based on your rental percentage.
4. The 14-Day Rule
There’s one major exception:
If you rent your space for fewer than 15 days per year, the income is completely tax-free.
No reporting. No deductions.
If you rent for 15 days or more, all rental income becomes taxable and you can begin deducting eligible expenses.
5. Depreciation and What Happens When You Sell
When you rent out part of your home, you can claim depreciation on that portion’s cost (excluding the land). Depreciation is a paper deduction that reduces taxable rental income each year.
However, when you eventually sell your home, the IRS will require “recapture” of that depreciation. That means the total depreciation you claimed will be taxed as ordinary income in the year of sale.
It doesn’t eliminate your ability to claim the $250,000 (single) / $500,000 (married) home sale exclusion, it just applies only to the non-rented portion of the home.
6. Keep Good Records
The IRS expects clear documentation for mixed-use homes. Be sure to:
- Use a written rental agreement
- Track rental income and expenses
- Document how you calculated the rental percentage
- Keep receipts and invoices
Good bookkeeping helps you claim every eligible deduction and stay compliant.
7. Final Thoughts
Renting out a room can be a smart financial move, but it does introduce some tax rules that homeowners should understand. With the right strategy and proper documentation, you can stay compliant and make the most of the deductions available to you.
If you’re thinking about renting out a room or you want to make sure you’re handling the tax side correctly, we’re here to help. Our tax professionals can walk you through the rules, maximize your deductions, and keep your filings accurate and compliant.