Taxable Income
Key Facts
- Rent received from renting out a room in your home is considered taxable income that must be reported to the IRS.
- However, you can offset your taxable rental income by deducting certain expenses related to the rental activity.
- Expenses that are fully deductible for the rented room include repairs, installations, painting, and providing furniture for the room.
- Additional deductible expenses for the entire home must be divided between the rented part and the part you live in. These expenses include mortgage interest, repairs, improvements, homeowners’ insurance, utilities, housecleaning or gardening services, trash removal, snow removal costs, security system costs, and condominium association fees.
- You can also deduct depreciation on the part of your home that is rented out.
- There are different methods for dividing expenses between the rented part and the part you live in, such as using the number of rooms or the square footage of your home.
- It is important to keep good records of your deductible expenses when renting out a room.
- In addition to deducting expenses, you may also qualify for the 20% pass-through tax deduction established by the Tax Cuts and Jobs Act if you operate your room rental activity as an individual, through an LLC, or partnership.
Rent received from renting out a room in your primary residence is considered taxable income and must be reported to the Internal Revenue Service (IRS) (Nolo, 2024).
Deductible Expenses
To offset taxable rental income, landlords can deduct certain expenses related to the rental activity (Nolo, 2024).
Room-Specific Deductions
Expenses that are fully deductible for the rented room include:
- Repairs
- Installations (e.g., carpet, drapes)
- Painting
- Furniture provided for the tenant
Home-Wide Deductions
Expenses for the entire home must be divided between the rented portion and the portion occupied by the landlord. These expenses include:
- Mortgage interest
- Repairs (e.g., roof, furnace)
- Improvements (e.g., roof replacement)
- Homeowners’ insurance
- Utilities (e.g., electricity, gas)
- Housecleaning or gardening services
- Trash removal
- Snow removal costs
- Security system costs
- Condominium association fees
Depreciation
Landlords can also deduct depreciation on the portion of their home that is rented out (Nolo, 2024).
Expense Allocation Methods
There are different methods for dividing expenses between the rented portion and the portion occupied by the landlord, such as:
- Number of rooms
- Square footage of the home
Record Keeping
It is essential to keep accurate records of deductible expenses when renting out a room (Nolo, 2024).
Pass-Through Deduction
Individuals, LLCs, and partnerships that operate room rental activities may qualify for the 20% pass-through tax deduction established by the Tax Cuts and Jobs Act (Nolo, 2024).
References
- Nolo. (2024). Tax Issues When Renting Out a Room in Your House. https://www.nolo.com/legal-encyclopedia/tax-issues-when-renting-out-room-your-house.html
- Kiplinger. (2023). How to Earn Tax-Free Rental Income — Legally. https://www.kiplinger.com/taxes/how-to-earn-tax-free-rental-income-legally
- Rocket Mortgage. (2023). How Is Rental Income Taxed? https://www.rocketmortgage.com/learn/how-is-rental-income-taxed
FAQs
How much rental income can I earn before paying tax?
There is no specific threshold for rental income before paying tax. All rental income is taxable, regardless of the amount.
What expenses can I deduct from my rental income?
You can deduct expenses that are ordinary and necessary for the rental activity, such as repairs, maintenance, utilities, depreciation, and a portion of your mortgage interest and property taxes.
How do I divide expenses between the rented portion and the portion I live in?
You can use any reasonable method, such as the number of rooms or the square footage of your home.
What is the pass-through deduction and how do I qualify?
The pass-through deduction allows individuals, LLCs, and partnerships to deduct up to 20% of their net business income from their income taxes. To qualify, you must operate your room rental activity as an individual, through an LLC, or partnership.
Do I need to report rental income on my tax return?
Yes, all rental income must be reported on your tax return, even if it is less than the threshold for filing a return.
What happens if I don’t report rental income?
If you fail to report rental income, you may be subject to penalties and interest from the IRS.
How can I avoid paying taxes on rental income?
There is no legal way to avoid paying taxes on rental income. However, you can reduce your tax liability by deducting eligible expenses and taking advantage of tax deductions and credits.
Is it better to rent out a room or the entire property?
The decision of whether to rent out a room or the entire property depends on your individual circumstances and financial goals. Renting out a room can provide additional income and help cover housing costs, while renting out the entire property can generate more income but also requires more work and responsibility.