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Renting Out a Room in Primary Residence: Everything You Need To Know About Taxes

Even after more than a decade, the ramifications of the 2008 housing collapse are still impacting Americans. 

Just under 43 million households (34.5%) in the United States are rentals. The total number of people living in rental housing decreased by roughly 7.4% from last year. That means that almost 101 million people are living in a rental situation. 

The high costs of real estate have led to many Americans looking for rentals. Some homeowners have decided to take this opportunity to earn a few extra dollars by renting out a room in their homes. There are plenty of benefits to renting out a spare room, but there are a few tax implications that you’ll need to know first.

If you rent out a room or heavily consider it, you should probably talk with a tax professional first. They can explain the tax obligations and financial responsibilities of being a landlord. 

What Should You Do Before Renting Out a Room?

Renting out a room might sound like a pretty easy way to earn some extra cash, but there is a lot that it will involve. You will need to follow these steps in order to protect yourself from potential repercussions:

Step One: Check Your Local Laws, Mortgage Agreement, and HOA Rules

You will need to double-check and make sure you are following your local laws, mortgage terms, and HOA agreement. Most mortgage lenders won’t mind if you rent out a room as long as you continue payments. Some HOA rules might not permit renting to another person, so you need to read over your agreement. 

The most likely issue will be your local laws. More and more cities are placing restrictions on short-term rental agreements like those found on Airbnb. They might also have square footage requirements or a specified number of bedrooms and bathrooms. Your city government website should provide all the information that you need to figure out if you can rent or not. 

Step Two: Talk With Your Insurance Agent

The insurance policy that you have to cover damages to your home might not allow rentals. You should check with your insurance agent and ensure that your current policy will remain active. 

Some insurance companies might require you to take out an additional policy, or they could increase your premium. It’s best to check with your agent beforehand and ensure the policy has you covered. 

Step Three: Prepare the Room

Once you are covered both legally and with your insurance, you’ll need to prepare the room. The process is a little easier if you are simply renting out a regular room in your house. 

There are a few more steps if you are trying to rent out a basement, attic, or guest house. You’ll have to make sure that the room is up to the housing codes in your local area. You might need to make a few home renovations before you can legally rent.  

Step Four: Create a Listing

There are plenty of apps and websites that you can use to get information about your room out into the world. You can also use these options to get an idea of a fair rental price. Check out the prices for similar rental options in your area so you can get the most income possible. Be sure to upload plenty of pictures so that potential renters will have a good idea of what they’ll be getting. 

Step Five: Perform a Background Check

Naturally, you’ll want to meet with your potential tenant and get to know them a little bit better. You should make sure to ask plenty of questions about their employment status, income, and lifestyle. You are legally not allowed to refuse a rental opportunity based on sex, race, religion, ethnicity, or disability. 

It would also be a good idea to run a background check and learn about your renter’s history. Remember that this person will be sharing your home with you. You should take the time to review all public information about them before allowing them into your home. 

Step Six: Establish Rules and Sign a Lease

You’ll need to establish clear boundaries and write them into a legal agreement. Be sure to include rules involving pets, curfews, visitors, or any other rules that you would like them to follow. 

The most important thing is getting a signature and legally binding the document. This can protect you from legal backlash in the future if anything goes wrong. 

You should also take this time to require a security deposit. Most security deposits include the lease agreement’s first and last month’s rent. 

What are the Deductible Expenses of Renting Out a Room?

Even though you are renting out a room in your house, the tax laws will be the same as if you were a landlord of an entire property

In addition to charging rent payments, you’ll also be able to deduct certain expenses that might come from renting. The tricky part is that these expenses are only deductible if they affect the rented room. 

For example, you can deduct the expenses of installing a new carpet, fixing a broken window, and painting as long as they occur within the rented room. Expenses that impact the entire house need to be properly divided before being deducted. 

Depending on how you divide them, you can potentially deduct the following expenses from your tax obligation:

  • Interest payments on your mortgage
  • Homeowner’s insurance payments
  • Utilities including electricity and gas
  • Trash and snow removal services
  • House cleaning or gardening services
  • Security system costs
  • Whole-home repairs or improvements such as repairing the roof, painting the entire house, or Replacing the HVAC system

The most important part about making these expenses deductible is dividing them. They would all be deductible if you owned separate rental property. However, you can’t deduct 100% of their cost as you also live in the rental property. 

The easiest way to divide the expenses is by the total number of rooms in your house or by the allotted square footage. For example:

  • Let’s say that your house has four rooms that are roughly the same size. Renting out one of these rooms is the equivalent of roughly 25% of your home. Using this method, you could deduct 25% of the operating expense of the home. 
  • Let’s say that your house has 1,500 square feet of floor space. If you were to rent out a 12 x 20-foot room, the rental space would be 240 feet. That would equate to roughly 16% of your home being rented so that you could deduct that amount from your taxes.

You might be able to qualify for the new “pass-through” tax deduction that was established by the Tax Cuts and Jobs Act of 2018. To qualify for this deduction, you need to be a “pass-through” business owner. 

Most businesses are C corporations, but renting a room inside your home may qualify you as a “pass-through” business as long as you turn a profit. If you are eligible for this deduction, you could end up deducting as much as 20% of your net business income. 

You may want to talk with a tax consultant to ensure that you are eligible for this valuable tax deduction. Some states can require you to establish an LLC or partnership in order to be considered a “pass-through” business. 

What Are the Downsides of Renting Out a Room?

Renting out a room in your house can generate a little extra income each month, but there are a few things to keep in mind

For starters, the rent you charge will be considered taxable income by the IRS. You will be charged based on your marginal tax rate and pay taxes on every dollar you receive. State and local taxes will also apply to whatever money you receive from your tenant. 

Another possible issue is that your renter might cause damage to your room and home. It would be a good decision to collect a security deposit from your tenant in order to help cover any potential damages. Your home insurance should help cover expenses of major damages, but making a claim will probably lead to your rates increasing. 

Arguably the worst-case scenario is that you could accidentally violate landlord laws and get sued. For example, something as simple as walking into the room you’re renting could be a violation. Technically, this would violate the tenant’s privacy if you failed to provide proper notice or permission to enter the unit. To avoid issues like these, you should brush up on the landlord-tenant laws of your state before taking on a renter.  

The Takeaway

Renting a room in your home is a way to make some extra money, but you’ll need to be careful. There are a lot of responsibilities that come with being a landlord. You should research the laws in your area to make sure that you’re covered legally. 

Another issue with being a landlord is that your taxes will be affected. The increase in income will create a higher tax obligation, but you’ll also be able to deduct more expenses. 

It’s probably a good idea to consult with a tax professional before creating a rental agreement. Coast One Tax Group tax experts can review your finances, make sure you’re paying the appropriate taxes, and help you maximize your deductions. 


Considerations When Renting Out a Room | US News

A big tax break could be yours, just by renting out a room in your house or apartment | CNBC

How Renting Out Your Spare Room Can Backfire | Investopedia

Tips on Rental Real Estate Income, Deductions and Recordkeeping | Internal Revenue Service

Renting Statistics [2021]: Facts & Trends in Rental Market | PropertyManagement.com

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