Room Rentals Generate Good Income
Are you familiar with how the IRS treats the income and expenses for when you rent rooms in your home? Due to the shortage of affordable housing these days, many homeowners are renting out rooms in their homes, providing themselves with some additional cash. Some questions that often come up in regard to room rentals include: Is the income taxable? If so, how do I report the income from a room rental? What deductions can I take on my tax form? Can I claim a loss on rent? Answers to these questions are as follows:
Rules to Renting Space in Your Home
Why does the IRS care if you have a sink or not? When a taxpayer rents rooms or other space in a home and the portion for rent does not have facilities, such as a bathroom and a kitchen, that would make it a dwelling unit on its own. In this scenario the IRS considers the taxpayer and the renter 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.
Vacation Home Rental Rules
As a result, the IRS treats the income and expenses under the same rules as vacation home rentals. The homeowner must report the income when you rent rooms on the Schedule E form, prorating with expenses deductible against the rental income in a specific order. Therefore, the landlord cannot claim a loss on the rental property.
Order of Deductions on a Rental
You may claim deductions in the following order:
- First, mortgage interest and taxes.
- Next, operating expenses (examples: advertising, repairs, utilities, maintenance, insurance).
- Finally, depreciation.
Loss Limitations on Room Rentals
When the result is a loss, the property owner can expense until the income reaches zero. The rental owner is able to carry over to the next year any expense that is unuseable when you rent a room in your home. Always keep in mind, there is the limit in the next year’s rental income. This means that you cannot claim a loss; however, the carry over helps you to recoup any investments you have made into the property. So that is useful information on your tax filing.
For taxpayers who own property and do rent rooms in their house, we encourage you to take a look at this example below. Here the room rent for the year totals $4,000, and the room is 15% of the home.
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 the first deduction 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.
Reasonable Expense Prorating
The taxpayer may use any reasonable method for dividing the expenses of a rental. The two most common methods for allocating expenses, such as mortgage interest and heat for the entire house, the basis is on the number of rooms in and square footage of the home. Look at this example beow for a portion of a property rental in a home.
Do you rent rooms in your home?
If you have questions that relate to renting a room or a vacation home, or about short-term rentals of your home, please give this office a call. You may reach Alex Franch, BS EA at 781.849.7200 or email the office at firstname.lastname@example.org to secure help with your rental property accounting needs. Also, you may book an appointment online here and you can meet with any of our tax experts. We are available by appointment at our three convenient locations in Norwell, South Weymouth and Dedham, Massachusetts.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA). He holds a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance. Alex Franch is a registered representative of, and offers securities and investment advisory services through, Commonwealth Financial Network. He is a registered broker-dealer, Member FINRA/SIPC.
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