You may be wondering: do you have to pay tax from renting a room in your house? Generally, the answer is yes – you will have to report the income on your tax return and you may owe tax on it. For the purposes of this article, we will assume you are renting a room in your primary residence. As discussed previously here, all rental income will be tax free regardless of how much you collect, if you rented the room for 14 days or less. Once you get over the 14 day mark, you now have a reporting requirement.
You are required to report all rental income from renting a room that you received, but you also have the opportunity to deduct certain rental expenses against the income. The items will be reported on Schedule E of your tax return. The difference in this situation, versus renting out an entire property, is that certain expenses have to be pro-rated between personal and rental use. Examples of these expenses include utilities, real estate taxes, mortgage interest, insurance, landscaping, and cleaning fees.
Calculating Your Deductions
There are two common methods for figuring out how to pro-rate the deductions between personal and rental. Option one is to look at the total rooms in your house. If you are renting 1 room, and you have 6 rooms in your house, then 1/6 of your allocable expenses will be deductible. The second option is to look at the square footage of the room you’re renting in proportion to the whole house. If the room is 250 sq. ft, and your house is 1250 sq. ft, then you would deduct 1/5 of your allocable expenses (250/1250).
You can also have direct expenses associated with renting a room, which would be 100% deductible against the rental income. Some examples would include advertising costs, rental commissions paid, and repairs made directly to the room (such as painting the room). You can also deduct depreciation on the room.
Since the property is for both business and personal use, you will be limited in your expense deduction up to the amount of rental income. Any unused amounts (any expenses over your total rental income for the year) will carry-forward and could be used as a deduction in future years.
One thing to watch out for is the possible classification of your activity as a hotel. If you have a dedicated room and if you provide substantial services that are primarily for the convenience of your guests, such as regular cleaning, changing linen, or maid services, you will need to report your rental income and expenses on Schedule C as opposed to Schedule E. Let them do the cleaning and you should be fine using a Schedule E.
You may also be on the hook for local/lodging/occupancy taxes. These vary considerably both by state and by city/town.
Airbnb and others make it easier to connect with prospective renters, but don’t forget about the tax consequences. Whether you are renting a room, your house, or a vacation home, be sure to get in touch with me if you have any questions.