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Do You Rent a Room or Your House as a Vacation Rental? Read This About Possible Tax Issues

by
Gordon W. McNamee
on
3/30/2019
Do You Rent a Room or Your House as a Vacation Rental? Read This About Possible Tax Issues

Homeowners who are looking for extra income have been turning to renting out rooms or areas in their homes: it’s a great way to defray costs and add to their household’s cash flow.  Though doing so seems relatively straightforward, reporting the income can be complicated, especially when it comes to differentiating between your personal expenses and the expenses attributed to the rental. Many people who pursue this path find themselves uncertain as to whether and how the income should be reported, whether they can take a loss on a room that they’ve designated as a rental, and what deductions, if any, they’re allowed to take.

If you are either considering renting a part of your home out or are already doing so and need answers, the information below will help.

When you are renting out an area of your home that does not have its own bathroom or kitchen, it means that you and the renter are sharing a single dwelling unit. When this is the case, and you as landlord are combining your personal household expenses (such as utilities) with the expenses being used to support your business, both your income and expenses are reported on Schedule E. This is the same reporting that is required if you have a vacation home that you rent out: you are not permitted to write off any type of losses and you are required to prorate any expenses that are deductible as rental income in a very specific order, as follows:

  • Taxes and mortgage interest
  • Operating expenses such as utilities, maintenance, insurance repairs and advertising
  • Depreciation

You are able to use each of these as an expense up until the point where the income from the room rental is brought down to zero, but no more than that because losses are not permitted. The good news is that if you have expenses that you are not able to use because you have reached the maximum allowed, you may be able to carry them over until the next year, at which time expenses will again be limited to the amount of rental income that the room rental brought in. 

Taking a closer look at this example, you can see that the top deduction is for the two expenses that essentially pay for the house: home mortgage interest and property taxes. As a homeowner, these are going to be deducted one way or another, but because a percentage of the home is being used as a source of rental income, the homeowner needs to prorate the deduction, and it comes off the top. Following those principle expenses, all of the other operating expenses for the home are calculated in the same way, though expenses that are specific to the rental — such as advertising – can stand alone. When the total expenses attributed to the rental exceed the total rental income as in this example, the overage of $117 cannot be deducted.

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. They can be carried over to next year.          

There is no specific method required for allocating the percentage of expenses that should be allocated to the rental property, but one of the most frequently used is by calculating the square footage of all of the rooms in the house and then calculating the percentage of that number represented by the rooms that are being rented.

To get the answers to more specific questions regarding rental income, whether for rooms in your home, short-term rental of your entire home or a vacation property, contact a qualified tax professional for a consultation.

Gordon W. McNamee, CPA writes for TaxBuzz, a tax news and advice website. Reach him and his team at [email protected] 

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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