Renting a Room in Your House
When you rent a room, or any part of your property, you must separate expenses between rental use and personal use.
Tax Advantages to Renting a Room
If you are a homeowner that rents out part of your home, you get the tax benefit of deducting a portion of your home ownership expenses. People that do not rent out a room do not receive this tax break. By renting a room in your house you are reducing your income taxes which means you are increasing your after-tax income!
If you rent part of your property (a room or a floor), you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two pieces of property.
Tax Deductions for Renting a Room
When you rent a room in your personal residence you can deduct expenses related to part of the property used for rental purposes. These deductions include the following:
- Real Estate Taxes and Home Mortgage Interest
- General Maintenance Expenses such as electricity, gas, HOA fees, general repairs to appliances that are available to the whole house (ie over, refrigerator, water heater, etc..)
- Expenses tied directly to the room itself. Examples would be installing a phone line or cable line directly into the room.
- Depreciation on the part of your residence used for rental purposes.
Dividing Rental Expenses
If an expense is for both rental use and personal use, such as home mortgage interest or electricity for the entire house, you must divide the expenses between rental and personal use. You can use any method for dividing expenses. The two most common methods for dividing an expense are one based on the number of rooms in your home and one based on the square footage of your home.
Renting a room in your home example: Eric rents out a room in his 3 bedroom house to Johnson. The room is 20 x 10 feet, or 200 square feet. Eric’s entire house is 2000 square feet. Eric can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. If Eric’s electrical bill was $800 for the entire house in 2013, he can deduct $80 ($800 x 10%) as a rental expense. The balance, $720, is a personal expense that he cannot deduct.
If Eric has a home office, he can claim a greater deduction. Let’s assume Eric ‘s 3rd room is an office. The office is 15 x 10 feet, or 150 square feet. This is 7.5% of his house (150 square feet / 2000 square feet). Eric can deduct $140 of the electrical bill for the year ($800 x 7.5% as a business expense and $800 x 10% as a rental expense).
Note that you do not have to divide expenses that belong only to the rental part of your property. For example, if you paint a room that you rent, of if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense.
Rental Expenses That Can be Fully Deducted
There are expenses that can be fully deducted and do not have to be divided between personal and rental use. This would include the installation of a separate phone line running into the rental room or the installation of a cable line. In these cases, you can deduct 100% of the cost as a rental expense.