Empty nesters occasionally rent unused rooms in their homes for extra income. The money earned from renting a room in your house is income, and the cash collected is taxable under rules enforced by the Internal Revenue Service. Tax liability for rented rooms in your home reduces your profits, but your rented room might have some tax benefits that make declaring the income advantageous.
Rooms to Rent
Some neighborhoods or homeowners associations allow owners to rent rooms in their home if located in areas zoned as residential. Converting rooms into studio apartments in most urban areas also requires a permit and an approval process, unless the house is located in an area zoned for multi-family use. Homeowners must persuade the city council and neighbors in single-family zones to sign an exemption for a rental. All of these actions let tax authorities know that you operate a rental business within your home.
Federal, State and Local Liabilities
Federal, state and some local agencies collect taxes on your rental-room income. Landlords must report rental income, including advance rent from tenants. For example, renters paying $5,000 for a year's rent plus another $5,000 for the upcoming year's use of a room may pay a total rent of $10,000. The IRS requires you to report this total for the year in which it is received. When renters pay utilities or other expenses you'd normally pay in your home, the IRS also classifies this cash as your income, and you must report it. States and localities typically use federal tax liabilities to calculate income, so you must also pay taxes on the rental income to those agencies where applicable.
Treat your vacant room as a small-business rental operation to earn the most income from your operation. Counties and cities occasionally require landlords to establish a business operation with lease permits and a business license to operate as a landlord. A separate bank account avoids co-mingling rental cash and house expenses with your personal bank accounts, and this allows you to quickly track your business operation. A separate checking account makes the job of calculating your business taxes at the end of the year an easier operation. This accounting also allows you to quickly collect information in the event of a tax audit.
Your lease may qualify for federal tax benefits as a business when you rent the room on a regular basis. Since your renter shares your residence, only a portion of the house expenses qualifies as possible deductions. The square footage in the rental room typically qualifies as depreciation, and a portion of your mortgage, home hazard insurance, property taxes, and maintenance for the home may also qualify as tax deductions for your rental business. You must also calculate the amount of utility expenses, including natural gas, water, electricity and trash, used by your tenant to deduct these expenses.
- Consumer Credit Counseling Service of Southern Oregon: Should You Rent Out a Room?
- IRS: Rental Income and Expenses -- Real Estate Tax Tips
- Jackson Hewitt Tax Service: Rental Property
- IRS: Publication 17 (2013) -- Rental Income
- The Press-Enterprise: Riverside -- Permits Now Required for More than Two Renters
- Fairfax County Virginia: Zoning Requirements -- Frequently Asked Questions
- IRS: Cash Incentive Businesses Audit Techniques Guide -- Chapter 3
- Fairwood West Homeowners' Association: Rules and Regulations Regarding Rental of Homes/Tenants
Lee Grayson has worked as a freelance writer since 2000. Her articles have appeared in publications for Oxford and Harvard University presses and research publishers, including Facts On File and ABC-CLIO. Grayson holds certificates from the University of California campuses at Irvine and San Diego.