Renting out a spare room can add to your income, but it also brings new tax responsibilities. Whether you are hosting short stays or leasing long-term, most rental income is taxable. To avoid unexpected costs and make the most of available deductions, you need to understand how renting part of your home affects your tax situation. Here’s what you need to report and how to stay compliant.
In most cases, yes. The IRS considers this rental income and expects it to be included on your federal tax return. The only exception is the 14-day rule. If you rent the space for 14 days or fewer during the year and use the home as your primary residence, you do not need to report the income. You also cannot deduct any related expenses.
If you rent for more than 14 days, you must report all the income. On the plus side, you may qualify to deduct certain expenses tied to the rental portion of your home.
The IRS separates personal use from rental use. This distinction matters because it affects what expenses you can deduct and how much of them you can claim.
If your tenant shares spaces like a bathroom or kitchen, you will need to allocate those shared-use areas along with the exclusive rental area. That allocation determines the portion of expenses you can deduct.
Short-term rentals may come with additional obligations. These can include lodging taxes, registration requirements, or zoning rules. Always check your local laws before hosting.
Long-term rentals tend to offer more predictability. They usually involve a lease agreement and fewer surprise regulations. The IRS still requires you to report the income, even if the rental is long-term.
Rental-related expenses fall into two categories:
You can also claim depreciation for the portion of your home used as a rental. Depreciation is spread out over 27.5 years and is based on the adjusted basis of the home and the rental-use percentage.
Here is a step-by-step guide to determine your deduction:
Use accurate records and keep documentation. A tax professional can help verify your calculations.
When a tenant shares spaces like hallways, kitchens, or bathrooms, you may include part of those areas in your rental-use calculation. Divide those shared spaces equally between personal and rental use. Then, add the rental-use portion to the dedicated room.
For example, if you rent a 200 square foot room and share 400 square feet of common area, you can add 200 square feet from the shared space to your total. This brings the rental-use area to 400 square feet, or 20 percent of a 2,000 square foot home.
Be consistent. Use the same method each year and maintain clear documentation in case the IRS has questions.
Repairs can be deducted in the year they happen. This includes patching drywall or fixing a leaky faucet.
Improvements must be depreciated over time. If you install new flooring or renovate a bathroom, you cannot deduct the full cost in the first year. Instead, you spread the expense over 27.5 years.
For example, spending $5,500 on new flooring for the rental area would result in an annual deduction of about $200.
You can deduct prep costs—such as painting or replacing light fixtures—in the first year, if those costs were necessary to make the room ready for rental use.
Good records help you stay compliant and maximize deductions. Be sure to keep:
Keep both digital and physical copies. Organized records make tax filing easier and reduce the risk during an audit.
Possibly. Homeowners can usually exclude up to $250,000 in capital gains ($500,000 if married) when they sell their primary residence. However, the part of your home used as a rental may not qualify for this exclusion.
You must also pay tax on any depreciation claimed for the rental space. This applies even if you qualify for the capital gains exclusion on the rest of the home.
Each city and state has its own rules. You may need:
Check with your city or county to avoid unexpected fines or penalties. A tax professional familiar with local requirements can help you stay in the clear.
Renting out a spare room can bring in extra income, but it also comes with added tax responsibilities. Knowing what to report, how to calculate deductions, and which records to keep can make a big difference.
A tax professional can help ensure you follow the rules and avoid mistakes.
Thinking about renting part of your home? Book a free consultation with DiMercurio Advisors and get expert guidance on staying compliant.