Tax Deduction for Room Rent

That spare bedroom outfitted with all the unused exercise equipment can net you some extra cash in your pocket each month. Homeowners who rent out rooms to offset their housing costs are plentiful, especially in tough economic times. Many people may be unaware, however, that rent money received in exchange for that empty room must be reported as income. Fortunately, the Internal Revenue Service treats this as a business, which means you have plenty of tax deductions to lessen your tax liability.

Determine the Basis for Deduction

Landlords who rent out one or more rooms in their home must prorate expenses between the rental room and the part used as personal living space, as though they are two individual rental units. For instance; if your home is 1,000 square feet and the extra bedroom you rent out is 100 square feet, you are entitled to deduct 10 percent of your expenses for the rental. For certain expenses such as the water bill the IRS considers it reasonable to divvy up the cost between the number of people living in the home.

Deductions

Expenses incurred from renting a room are no different than the expenses for a separate rental structure. You are allowed to deduct the expenses for your mortgage interest, property insurance, taxes, maintenance and repairs. The portion of your home used as a rental can be depreciated, as well as any furniture you provide for the room. The depreciation expenses are recovered through tax deductions on your tax return each year. Begin to depreciate your room on the date you place it in service. Since you also provide utilities for the room, you can deduct the portion you supply that are not paid by the tenant, with the exception of a shared phone line. You cannot deduct any part of your primary phone line even if your tenant uses it without limitations.

Direct Expenses

There are certain expenses that are related directly to the room that do not involve any other portion of your primary living space, such as paint for the rental or for separate insurance premiums that you pay exclusively for renting out a room in your home. These expenses are 100 percent deductible and do not have to be prorated. A second phone line that is installed in the tenant's room is fully deductible as long as it's used exclusively by the tenant.

How to File

Keep good records of your rental expenses throughout the year; figuring your deductions for the room will be much easier. Calculate your gross rental income and subtract your expenses on Schedule E Form 1040, Part I. You must fill out and include Form 4562 for the rental depreciation.

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