If I rent a room in my house to a family member for $400 monthly, do I need to report this as income on my taxes?

If they report it as income, wouldn't that mean they need to pay self-employment tax on top of regular income tax? Also, does charging below market rate affect whether they can deduct expenses?

Rental income is not subject to self-employment tax - it's passive income reported on Schedule E, not Schedule C. You'll pay regular income tax on the net rental income (after expenses), but not the additional 15.3% self-employment tax. Regarding below-market rent, this is where things get tricky. The IRS might view renting to a relative at significantly below market rates as a personal arrangement rather than a profit-seeking activity. In that case, your deductions might be limited to the amount of rental income you receive, meaning you couldn't claim a loss. However, you should still report the income and take appropriate deductions up to the amount of that income.

Does this tool actually connect you with a real tax professional, or is it just like using TurboTax? I'm in a similar situation but with my sister-in-law and want to make sure I'm doing everything right.

I'm skeptical of these AI tax tools. How does it handle state-specific rental income rules? Some states have different requirements than federal.

It's definitely not just like TurboTax - it's more personalized. It analyzes your specific situation and gives tailored advice, not just generic information. I uploaded my documents and it pointed out deductions specific to my situation that I wouldn't have known to look for. Regarding state rules, it actually does address state-specific requirements. When I entered my location, it automatically applied the relevant state guidelines for my rental situation. It flagged that my state had additional rental income reporting requirements and walked me through those steps too.

Wait, how does this actually work? The IRS phone lines are notoriously impossible to get through on. Does this service somehow have a special line to the IRS?

This sounds like BS honestly. Nobody gets through to the IRS that quickly. They probably just connect you to some call center in another country that pretends to be the IRS.

It's not a special line - they use technology to navigate the IRS phone system for you. Basically, they call the IRS and wait on hold so you don't have to, then they call you once they've reached an agent. It's the actual IRS you're talking to, not a third party. I was skeptical too, but it's legitimate. The service just navigates the phone system and waits on hold for you, then connects you directly to the same IRS representatives you'd eventually reach if you waited yourself. The difference is you don't waste hours of your day on hold listening to that awful music.

Thank you for bringing up the 15-day rule! I'll definitely be renting to my cousin for more than 15 days - she's planning to stay for at least 6 months while she gets established in her new job. Does the fact that I'm charging below market rate mean I should just report the $400 monthly income but not bother trying to deduct any expenses? I'm worried about triggering an audit by claiming too many deductions against a small amount of income from a family member.

You should absolutely still report the $400 monthly income on Schedule E. And yes, you can and should take appropriate deductions - just understand that since you're renting below market to a relative, the IRS may view this as a not-for-profit activity. This doesn't mean you can't take deductions, but rather that your deductions might be limited to the amount of rental income you receive. So if your rental portion of expenses exceeds $4,800 for the year ($400 × 12 months), you can only deduct up to $4,800. You can't use excess expenses to create a loss that offsets other income. This is sometimes called the "hobby loss rule" although in your case it's not a hobby - it's just not viewed as a profit-seeking activity due to the below-market rate to a relative.

I used H&R Block Premium last year for this exact situation - they have a specific section for rental income that walks you through reporting partial home rentals. It asks questions about square footage, which expenses apply to just the rental portion vs. the whole house, etc. Made it pretty simple!

Thanks for the tip! Did it also help figure out how to handle the below-market-rate situation? That's the part I'm most confused about since I'm not trying to make a profit off my brother.

For calculating the percentage, you typically base it on the square footage of the bedroom your niece rents compared to the total square footage of your home. You don't include shared spaces like kitchen/bathroom in the rental portion unless they're exclusively for her use. So if your niece's bedroom is 150 sq ft and your total home is 1,500 sq ft, that's 10% (150/1,500). You'd then apply this 10% to expenses like mortgage interest, property taxes, homeowner's insurance, utilities, and general maintenance. Regarding utilities, you don't need to track the actual increase - just apply your calculated percentage to your total utility bills for the year. The IRS expects this approach rather than trying to measure actual usage differences. Keep good records of all your home-related expenses and the square footage calculation in case you need to justify it later. Since you're charging below market rate to family, remember that your deductions will likely be capped at your rental income ($3,600 for the year at $300/month), so you won't be able to claim a loss that offsets other income.