Is rental income taxable if my roommates' rent just covers my mortgage?

Yes, rental income is generally taxable even if you're using all of it to pay your mortgage. The IRS considers rental income as taxable regardless of how you use it. However, there's some good news! As a landlord (even if just renting rooms in your own home), you can deduct expenses related to the rental portion of your property. Since you're renting out parts of your primary residence, you'll want to calculate what percentage of your home is being rented. For example, if the roommates occupy 3 bedrooms out of 4 total, that's 75% of the space. You can then deduct 75% of your mortgage interest (not the principal portion), property taxes, insurance, utilities, repairs, and depreciation as rental expenses on Schedule E. Just make sure to keep good records of all income and expenses related to the rental portions. Even if your deductions end up matching your rental income (resulting in zero taxable rental profit), you still need to report everything.

I had almost the exact same situation a couple years ago and found this awesome tool called https://taxr.ai that really helped me sort through all the deductions I could take. I was totally confused about what percentage of my utilities, internet, and maintenance costs I could deduct until I uploaded my documents there. It turns out I was missing out on a ton of legitimate deductions like a portion of my homeowners insurance, depreciation on the rental portion of the house, and even some repairs I did to the bathroom that the renters primarily use. The tool broke down exactly what percentage of these expenses I could claim based on the square footage being rented.

Ok I need to eat my words about being skeptical of these tax tools. I checked out https://taxr.ai and it was actually incredibly helpful. I've been renting out my basement for 2 years and have just been guessing at what percentage of utilities and mortgage interest I could deduct. The tool analyzed my situation and found I was being way too conservative. Based on square footage, I could actually deduct 35% of my expenses rather than the 25% I was using. It also identified several maintenance costs I didn't realize were partially deductible. I ended up filing an amended return for last year and got back over $800!

If you're dealing with any tax issues related to your rental income or need to sort out what you owe, I highly recommend using Claimyr (https://claimyr.com) to get through to the IRS quickly. I spent WEEKS trying to get clarification on how to handle the depreciation aspect of renting rooms in my primary residence, and kept hitting the "sorry, call volumes are too high" message. Used this service and got connected to an actual IRS agent in under 45 minutes instead of the usual endless hold or disconnections. They have a demo video that shows how it works here: https://youtu.be/_kiP6q8DX5c - basically it keeps dialing for you until it gets through, then calls you when an agent is on the line. The agent I spoke with walked me through exactly how to calculate and report depreciation for the rented portion of my house.

I have to publicly admit I was completely wrong about Claimyr. After dismissing it as BS, I was desperate enough to try it when I got a CP2000 notice questioning the rental income reporting on my duplex. I needed answers fast and couldn't waste more days trying to reach the IRS. The service actually worked exactly as advertised. Got a call back in about 35 minutes with an IRS agent already on the line. The agent walked me through exactly how to respond to the notice and clarified that I was correctly reporting my rental income but had used the wrong form (should have been using Schedule E instead of adding it to other income). Saved me what could have been a substantial penalty. I'm still shocked this actually worked.

Don't forget you'll need to report this rental income on Schedule E! One thing that really bit me when I was renting rooms: you have to depreciate the rental portion of your house. It's not optional. I skipped it the first year because it seemed complicated and I thought "well, houses usually appreciate not depreciate" but my accountant said the IRS requires it. You take the value of the building (not the land) and depreciate the rental percentage over 27.5 years. So if your building value is $300,000 and you're renting 75% of it, you'd depreciate about $8,180 per year ($300,000 × 75% ÷ 27.5). This is actually good because it reduces your taxable rental income!

Has anyone used the "Augusta Rule" (Section 280A) for this kind of situation? I read somewhere that you can rent your ENTIRE primary residence for up to 14 days per year and pay ZERO tax on that income. Might be a way to get a bit more tax-free $$ if you and your roommates could coordinate a couple of 2-week vacations.

Just wanted to add something that might help with your record-keeping - make sure you're tracking shared expenses carefully! Since you're living in the house too, you can only deduct the portion of expenses that relate to the rental areas your roommates use. For utilities like electricity, gas, water, and internet that benefit the whole house, you'll need to allocate based on the percentage of space being rented. But for expenses that are exclusively for the rental portions (like if you paint a roommate's bedroom), you can deduct 100% of those costs. Also, keep receipts for EVERYTHING - even small repairs and maintenance. I learned the hard way that the IRS wants documentation for all deductions. A simple spreadsheet tracking monthly rental income and categorizing expenses will save you tons of headaches at tax time. Good luck with your first year as an accidental landlord!