Contributed by: MatthewD, FreeTaxUSA Agent, Tax Pro
Renting out a room or part of your personal residence during the year can be a great way to make additional income. In many cases, however, it creates an income reporting requirement on your tax return. FreeTaxUSA will guide you through the correct steps.
Whether you're renting just a single room or a portion of your house, income and expenses are claimed on Schedule E.
First, how much income or expense you claim depends on a few factors, such as the number of days rented.
Rent you receive for 14 days or less is not taxable. And you won’t deduct any rental expenses either. On day 15 and beyond, rental income and expenses are reported. Plus, to be considered a personal residence you must have also lived in the house 14 days or more, or at least 10% of the time while renting to others. Check out IRS Tax Topic 415 for a quick reference on these rules.
Second, consider what expenses are personal use and rental use.
You may need to divide expenses such as mortgage interest, property taxes, and utilities between yourself and your renters. You can use any reasonable method to divide your expenses between your residence and the rental portion of the home. The two most common methods for dividing expenses in this situation are either by the number of rooms, or by the square footage. Direct expenses, such as hiring someone to come in and clean the space in between renters or occupants is 100% deductible.
Here’s an example. Your residence has total square footage of 2,000 square feet and 8 rooms. If the basement is rented entirely to a tenant and it has 3 rooms and 1,000 square feet, you would either treat 50% as rental property going by the square footage method, or 37.5% if going by the number of rooms method. Both methods are allowable, and you may only choose one. In this example you choose the square footage method.
Say you live in your house all year and twice you rent out your basement for a total of 6 months, charging $350 per month.
In between renters, you pay $235 to have the basement cleaned. For the year, all utilities in the house add up to $750.
On your tax return you’d claim $2100 of rental income and an expense of $235 for room cleaning. Since you rented half the home for half the year using the square footage method, you’d claim a utility expense of $187.50 which looks like this:
- $750 / 2 = $375, and then $375 / 2 = $187.50 deductible utility expense
In addition, because you own the home, you're allowed to claim both a portion of the mortgage interest and property taxes paid. This is based on the portion of the house rented and the percentage of the year the basement was rented.
In this example, the total mortgage interest for the year was $10,000 and the real estate tax was $1,000. You’ll have deductible mortgage expense for the rental of $2,500 and a deductible real estate tax expense of $250. Here’s how that looks:
- $10,000 / 2 = $5000, and then $5000 /2 = $2500 deductible mortgage interest
- $1000 / 2 = $500, and then $500 / 2 = $250 deductible real estate taxes
The remaining $7,500 of mortgage interest and $750 of real estate tax would be deductible as an itemized deduction on Schedule A.
Third and finally, know your local rules for occupancy or transient tax. Some cities and/or states may require you to report occupancy tax. Check your city’s website or your state’s revenue / income tax department website for information.
