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Tax Treatment of a Room Rental

With the shortage of affordable housing these days, many homeowners are renting out rooms in their homes, providing themselves with some additional cash. 

Questions that are often raised in regard to room rentals include: Is the income taxable?  If so, how is it reported? What deductions are allowed?  Can a loss be claimed?  Answers to these questions follow.

If a taxpayer rents rooms or other space in a home and the rented portion does not have facilities (a bathroom and a kitchen) that would make it a dwelling unit on its own, the taxpayer and the renter may be considered to be occupying one dwelling unit.  Thus, the “landlord” is mixing personal expenses with business expenses, a situation in which the tax code does not permit a loss. 

As a result, the income and expenses are treated under the same rules as vacation home rentals and are reported on Schedule E, with prorated expenses deductible against the rental income in a specific order and no loss being allowed. 

The deductions are claimed in the following order:

  • First, mortgage interest and taxes. 
  • Next, operating expenses (examples: advertising, repairs, utilities, maintenance, insurance). 
  • Finally, depreciation. 

If the result is a loss, the expenses are only allowed until the income is reduced to zero.  But some unusable expenses may be carried over to the next year, where again they and the next year’s expenses will be limited to the next year’s rental income.

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Because the expenses are taken in a specific order, home mortgage interest and property taxes paid for the home (which, for many taxpayers, would be deductible anyway) are first deducted from the rental income.  Next come the operating expenses, of which only $1,300 of $1,417 is deductible in this example because that amount reduces the rental income to zero. Thus, $117 of the operating expenses and the depreciation are not deductible. 

Any reasonable method for dividing the expenses may be used.  The two most common methods for allocating expenses, such as mortgage interest and heat for the entire house, are based on the number of rooms in and square footage of the home.

Here at HIPPO, we aid our clients in navigating through complex tax issues, including those related to their home.  If you have questions related to renting a room or a vacation home, or about short-term rentals of your home, please give this office a call.

Please check with your tax advisor, your Curran Wealth relationship manager, 
or contact Curran Wealth Management if you have any questions.  
 518.391.4200 •
info@curranllc.com


The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness.  The contents of this article are based on the tax laws existing at the time of publication.  Tax laws are subject to continual change.  In addition, tax laws vary by state.  This article is not, and should not be regarded as tax advice.  The information contained in this article may not apply to your personal circumstances.Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.  If you would like a detailed analysis of your tax situation, with specific tax recommendations, you can discuss the possibility of pursuing a formal relationship with Hippo Tax Services.