Tax Treatment of a Room Rental

Posted by Lee Reams Sr., BSME, EA on

Expenses allocable to a portion of a dwelling unit rented out are deductible under the vacation home rules. The amount of the deductible rental expenses would be the expenses attributable to that portion of the unit. And the days to be taken into account under that limitation rule would be the days on which the portion of the unit is rented at fair rental during the tax year and the days on which the portion of the unit is used for any purpose during the tax year.

Any reasonable method for dividing the expense 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 the house and square footage of the home.

Example - Taxpayer's home has 1,800 square feet. He rents out one room that is 180 square feet for the entire tax year. Taxpayer can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. Thus, if taxpayer's heating bill for the year for the entire house was $600, $60 ($600 x 10%) is a rental expense and the $540 balance is a nondeductible personal expense. If the home consisted of eight rooms, the taxpayer could presumably deduct 12.5% (one-eighth) of the expenses as rental expenses rather than the 10% that is based on square footage. The expenses that belong only to the rental part of the property, for example painting the room, don't have to be divided. 

If a taxpayer rents rooms or other space in a home and the rented portion does not have facilities (bathroom and 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, and any loss on the rental may be disallowed under §280A.

Where a loss is not allowed, the deductions are claimed in the following order. If the result is a loss, the expenses are only allowed until the income is reduced to zero.

  • Mortgage interest and taxes.
  • Operating expenses (examples: repairs, utilities, maintenance, insurance)
  • Depreciation

Bottom Line: Under these rules if a taxpayer were to rent a bedroom in their home, the income would be reported on Schedule E and the result cannot be a loss. 

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