Is Renting a Room an Investment for Income Taxes & the IRS?
Renting a room in a home must be properly reported on your tax return. Keep good records of all household expenses so that you may properly deduct those that apply to your rental. In order to properly take deductions for the room you are renting, you should approach expenses for that room as if it were a separate property. Try to keep utilities separate for that rental room from the rest of the house that you use as personal property.
IRS Definition of Income
Section 61 of the Internal Revenue Code defines income as all income from whatever source derived. The definition then includes a nonexclusive list of items that is considered gross income. The tax code is structured in such a way that unless there's a specific exception, most activities that generate money are considered gross income.
Is Renting a Room an Investment for Income Tax?
Given the expansive definition of income under the Internal Revenue Code, renting a room is considered to be an investment for income tax purposes. In fact, rents are specifically listed as an income item in the definition of gross income. This means that you must pay taxes on the rental income you receive from that transaction.
Allocation of Expenses
If you are renting a room, you must allocate expenses between the personal use of your house and the room you are renting. Essentially, you will be treating the rented room as a separate property. In order to divide the expenses, you may use any reasonable method to allocate the expenses. For example, you can divide by the number of people in your household, the number of rooms or the square footage of your house compared to the rental room. While there is no change in the expenses you may deduct for the portion of your home that you use for personal use, you may be able to deduct expenses related to the rental room, such as mortgage interest and property taxes, as rental expenses.
Rental Income Deductions
You can deduct other expenses that you may not deduct for the personal use section of your home, such as electricity or expenses incurred in the maintenance and upkeep of that rental room. Keep in mind that the IRS does not permit a deduction on the first phone line in a house, but you may deduct a second phone line that is used exclusively by your tenant. You must itemize your deductions in order to claim these expenses and they would be claimed on Schedule E of Form 1040.
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