Renting a Room in Your Home: Tax Rules for Homeowners

Income, expenses, and allocation

When you rent a room or portion of your primary residence to a tenant, the rental income is taxable and must be reported on Schedule E. You can deduct a proportionate share of home expenses against that income.

Common allocation methods: number of rooms (if the rented room is 1 of 6 rooms, the rental portion is 1/6) or square footage (rented area ÷ total home area). Use a consistent method each year.

Deductible proportionate expenses include: mortgage interest, property taxes, homeowners insurance, utilities, and repairs that benefit the whole home. Expenses that benefit only the rental room (a lock, separate HVAC unit) are 100% deductible without allocation.

The Section 121 home-sale exclusion later shields the personal-use portion of your home's gain. The rental portion is subject to recapture.

The 14-day rule: when room rent is tax-free

Section 280A(g) — sometimes called the Augusta Rule — provides that rental income is not taxable if you rent your home for fewer than 15 days per year. If you rent a room (or the whole home) for 14 days or fewer, you report zero income and get zero deductions. The rental is invisible to the IRS.

Once you cross into 15 or more rental days in a year, all rental income becomes taxable and you can claim the proportionate deductions. The 14-day threshold is sharp — 14 days is entirely excluded, 15 days means everything is included.

Depreciation and what happens when you sell

You can — and should — claim depreciation on the rental portion of your home. The depreciable basis for the rental portion is the lesser of cost or fair market value at the time the rental activity began, allocated by the rental percentage.

Example: home purchased for $400,000 when FMV was $400,000; 20% is rented. Depreciable basis = $400,000 × 20% × (building portion ÷ total). Depreciate over 27.5 years.

When you sell the home, the Section 121 exclusion ($250,000 single / $500,000 married) covers gain from the personal-use portion. The rental-portion gain is taxable, and accumulated depreciation is subject to recapture. Keeping a depreciation schedule for even a small room rental is worthwhile so you can correctly allocate gain at sale.

A worked example: one year of a room rental

You own a 2,000-square-foot home and rent a 300-square-foot bedroom (plus reasonable shared-space use) for the full year at $900/month. Rental income for the year is $10,800, reported on Schedule E.

Your allocation fraction by square footage is 15% (300 ÷ 2,000). Whole-home expenses for the year: mortgage interest $14,000, property tax $6,000, insurance $1,800, utilities $3,600, and $1,000 of general repairs — $26,400 total. The rental share is 15%, or $3,960. A $500 repair to fix the tenant's room door is 100% deductible.

Depreciation: the home's building basis is, say, $360,000 (land excluded). The rental portion is $360,000 × 15% = $54,000, depreciated over 27.5 years — about $1,963 a year.

Net Schedule E result: $10,800 income − $3,960 shared expenses − $500 direct repair − $1,963 depreciation = about $4,377 of taxable rental profit. The other 85% of the mortgage interest and property tax stays on Schedule A if you itemize.

Vacation-home loss limits usually don't apply — but Section 280A can

Renting a room in your main home where you also live is a personal-use dwelling under Section 280A. That section limits your rental deductions to your rental income when the dwelling is used personally for the greater of 14 days or 10% of rental days — which a room in your own residence always exceeds. In practice this means a room rental generally cannot generate a tax loss that shelters your other income.

Deductions are taken in a specific order: first the allocable interest and taxes, then operating expenses like utilities and insurance, then depreciation last. If income runs out, the excess operating expenses and depreciation are carried forward to future years, not lost. This ordering also preserves your depreciation deduction for years when the room is more profitable.

Shared-space allocation: rooms vs. square footage vs. common areas

The two accepted methods — number of rooms and square footage — can produce meaningfully different results, so pick the one that fairly reflects the tenant's use and apply it consistently. The room-count method is simplest; square footage is usually more defensible because rooms are unequal in size.

A gray area is shared common space (kitchen, living room, hallways) the tenant uses alongside you. The IRS has not published a single mandated formula. A reasonable approach counts the tenant's private space as fully rental and treats truly shared areas as personal, or applies a modest allocation to shared space based on relative use. Whatever you choose, write down your method and keep it stable year to year.

What happens to the Section 121 exclusion at sale

There is an important nuance most homeowners miss. Because the rented room is within the same dwelling unit as your residence (not a separate structure like a detached ADU or duplex side), you do not have to allocate the gain between business and personal use for exclusion purposes — the whole gain can qualify for the Section 121 exclusion, except that you must still recapture depreciation.

Concretely: you cannot exclude gain equal to the depreciation you took (or were allowed to take) after May 6, 1997 — that portion is "unrecaptured Section 1250 gain," taxed at up to 25%. The rest of the gain, up to $250,000 single / $500,000 married filing jointly, can be excluded if you meet the 2-of-5-year ownership and use tests. This same-dwelling-unit rule is more favorable than the treatment of a separate rental structure, where gain must be split.

You also must have used the home as your main residence for at least two of the five years before sale. Renting a room while living there does not break your personal use of the home, so it typically does not jeopardize the exclusion — only the depreciation recapture carve-out applies.

Common mistakes and planning tips

Skipping depreciation to avoid recapture. This backfires: recapture applies to depreciation "allowed or allowable," so you owe it whether or not you actually claimed the deduction. Take the deduction you are entitled to.

Double-deducting interest and taxes. The rental share goes on Schedule E; only the remaining personal share goes on Schedule A. Don't claim the full amount in both places.

Forgetting the QBI angle. A room rental that rises to the level of a trade or business may generate qualified business income eligible for the Section 199A deduction, but a casual, passive room rental often does not. Evaluate the facts rather than assuming.

Ignoring state and local rules. Some cities require registration, a rental license, or collection of transient occupancy (hotel/lodging) tax for short-term room rentals, and state income tax generally follows the federal Schedule E result. Check local ordinances before advertising a room, especially for short stays.

Roommates who split costs vs. a true rental

Not every shared-living arrangement is a rental. If a roommate simply reimburses you for a share of household expenses — splitting the utilities and groceries with no profit element — the IRS generally treats that as a nontaxable cost-sharing arrangement, not rental income, and you get no rental deductions or depreciation either.

The line is whether you are renting for profit. Charging a set monthly rent that exceeds a fair share of costs, advertising the room, and screening tenants all point toward a rental activity that must be reported on Schedule E. A casual cost-split with a friend or family member usually does not. When a relative pays clearly below-market "rent," the arrangement can be treated as personal use rather than a rental, which limits or eliminates the deductions entirely.

Document which situation you're in. If it is a genuine rental, report the income and claim the deductions; if it is cost-sharing, keep records showing the payments merely reimburse actual expenses so you can explain why nothing appears on Schedule E.

Short-term room rentals: extra wrinkles

Renting a room by the night through a platform changes two things. First, if the average guest stay is seven days or fewer, the activity is generally not treated as a rental for passive-activity purposes and, if you provide substantial services (cleaning during the stay, meals), the income can be subject to self-employment tax and reported on Schedule C rather than Schedule E. Second, the platform may issue a Form 1099-K, and many localities impose occupancy taxes the host must collect and remit.

For occasional short-term use, the 14-day rule still governs: rent the room 14 nights or fewer across the whole year and the income is entirely tax-free under Section 280A(g), with no deductions. Cross to 15 nights and everything becomes reportable.

Frequently asked questions

Is room rental income taxable?

Yes, if you rent for 15 or more days per year. Fourteen days or fewer is excluded entirely under Section 280A(g). Once you exceed 14 days, all income is taxable.

Can I deduct my mortgage interest on the rented room?

The proportionate share of mortgage interest allocable to the rental room is deductible on Schedule E. The personal-use portion remains deductible on Schedule A if you itemize.

Does renting a room affect my Section 121 exclusion?

Because the room is within your dwelling unit, you generally do not split the gain — the full gain can qualify for the $250,000/$500,000 exclusion if you meet the ownership and use tests. The one carve-out is depreciation: gain equal to depreciation taken (or allowable) after May 6, 1997 cannot be excluded and is taxed as unrecaptured Section 1250 gain at up to 25%.

Can renting a room create a tax loss I can deduct against my job income?

Generally no. Because you also live in the home, Section 280A limits your deductions to your rental income, so a room rental usually cannot produce a deductible loss. Excess operating expenses and depreciation carry forward to future years instead of being lost.

How should I allocate expenses between personal and rental use?

Use either the number-of-rooms method or, more defensibly, square footage (rented area ÷ total living area), and apply it consistently. Expenses that benefit only the tenant's space are 100% deductible; whole-home expenses are split by your allocation percentage.

Do I have to depreciate the rented room?

You should. Depreciation recapture at sale applies to depreciation "allowed or allowable," meaning you owe it even if you skipped the deduction — so not depreciating gives up a current deduction while still owing recapture later.

Are there local taxes or licenses for renting a room?

Possibly. Many cities require registration or a rental license, and short-term room rentals may owe transient occupancy (lodging) tax. State income tax generally follows your federal Schedule E result, but check local ordinances before renting.

Sources

Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.