Tax Treatment of a Room Rental

Article Highlights:

Vacation Home Rental Rules
Order of Deductions
Loss Limitations
Expense Prorating

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.

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.

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.

Share this article...

Facebook

Twitter WhatsApp LinkedIn Pinterest Pocket Reddit Email

Want tax & accounting tips and insights?

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Get in Touch with Manville & Schell, PC

You can count on us for professional, timely and reliable tax and accounting services. If you’re ready to get started, just fill out this form and we’ll be in touch.

1756 Barlow Street, Suite #7252
Traverse City, Michigan 49696

(231) 947-8707

growinggreen@manvilleandschell.com

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

I consent to receive SMS messages and agree with the