Many individuals are attempting to earn a few extra dollars by renting out a room in their house. In terms of taxes, there is both good news and bad news. The bad news is that rent is taxable income that must be reported to the IRS. The good news is that your taxable rental income can be offset entirely or partially by the tax deductions to which you will be eligible. The tax regulations apply to you if you rent out a room in your house in the same way that they do to landlords who rent out full homes. This implies you may deduct the costs associated with your rental business. However, there is one significant difference: you must divide some expenditures between the portion of the home you rent out and the one you live in, just as if you had two different pieces of land. 

Reporting Rental Revenue and Costs: 

The first step is to declare rental income and costs since the IRS can discover unreported rental revenue through tax audits. At that time, the IRS will decide if you have any unreported rental income. If this is the case, the IRS will make a payment demand. 

To be honest, the IRS will deal with you severely, so for your own peace of mind, simply report and pay your taxes. In most circumstances, a taxpayer’s rental income must be reported on their tax return. In general, they utilize Schedule E (Form 1040) to record rental real estate income and costs. If a taxpayer suffers a loss through renting real estate, the loss may have to be reduced or it may not be permitted. Taxpayers must follow regulations for personal use of a rented residence, at-risk rules, and passive activity loss rules.

Types of Rental Revenue

Rental revenue consists of:

  • Typical rent payments
  • Rent payments in advance
  • Payments for terminating a lease
  • Expenses incurred by the tenant

A security deposit is normally not included in rental revenue if the taxpayer intends to return it to the tenant at the conclusion of the lease. However, if the taxpayer holds part or all of the deposit during any year because the tenant fails to meet the terms of the lease, the amount held is included as rental revenue in that year. 

Deductible Expenses

You can completely deduct (or depreciate) any costs incurred just for the room you rent, such as fixing a window, putting carpet or curtains, painting the room, or furnishing your renter with furnishings (such as a bed). Furthermore, if you pay additional homeowners’ insurance premiums because you’re renting out a room, the entire amount is deducted as an operating expenditure. If you install a second phone line solely for the purpose of your renter, the entire cost is deducted as a rental expenditure. However, even if your renter has unlimited use of the first phone line, you cannot deduct any portion of the expense.

Expenses for your full property must be split between the parts you rent and live in. This covers payments for the following items:

  • Residential mortgage interest
  • Repairs to the entire house, such as replacing the roof or furnace or repainting the entire house
  • Upgrades to the entire house, such as upgrading the roof
  • Insurance for homeowners 
  • Electricity, gas, and heating oil are examples of utilities
  • House cleaning or gardening services for your entire residence
  • Garbage collection
  • Costs of snow removal
  • Cost of a security system, and
  • Fees for condominium associations

 You can also deduct depreciation on the portion of your home that you rent out.

You are free to divide these expenditures in any way that makes sense to you. It may be appropriate to split the cost of some things (such as water) according to the number of people who use them. The two most frequent techniques for dividing an expenditure, however, are based on the number of rooms in your house or the square footage of your property.

Special rules

 The IRS introduced special rules. If a taxpayer leases out a dwelling that is designated a residence for fewer than 15 days during the year, special regulations apply. In this case, the taxpayer fails to declare rental income and fails to deduct rental expenditures. Thus, if you have leased or plan to rent a room, you should review these things beforehand, and if you rent it via us, you may be eligible for rental discounts, so please contact us at any time!