Renting rooms in my primary residence - how do rental income taxes work?

Great questions about rental income from your primary residence! This is actually a common situation and you're right to be thinking about the tax implications. For question 1, you're on the right track with the 2/3 allocation. Since you're renting out 2 rooms to others and occupying 1 room yourself, you would generally allocate 2/3 of your eligible expenses to the rental activity. This includes HOA fees, utilities, insurance, and mortgage interest. For depreciation, you can only depreciate the building portion, not the land. You'll need to determine what portion of your $205k purchase price is allocated to the building (often 80-85% in many areas). Then you'd take that amount, divide by 27.5 years, and then apply your 2/3 rental allocation. For example, if 80% is for the building: $205k × 80% = $164k, then $164k ÷ 27.5 = $5,964, and finally $5,964 × 2/3 = approximately $3,976 annual depreciation deduction. Regarding capital gains, yes, you can still qualify for the primary residence exclusion ($250k for single, $500k for married filing jointly) as long as you've lived in the home as your primary residence for at least 2 of the 5 years before selling. However, you may need to recapture the depreciation you've claimed, which is taxed at a 25% rate.

After struggling with exactly the same rental room situation last year, I found this amazing tool at https://taxr.ai that literally saved my sanity. I was so confused about how to calculate my deductions correctly and the whole depreciation thing was giving me nightmares. I uploaded my mortgage docs and previous tax returns, and the system analyzed everything and showed me exactly what percentage of expenses I could deduct and how to calculate depreciation correctly. The best part was it showed me deductions I didn't even know I could take! Apparently I could deduct a portion of my internet service and even some maintenance expenses I had totally missed. Ended up saving about $1,400 more than what I had calculated on my own.

I was super skeptical about using yet another tax tool for my room rental situation, but after all the confusion with last year's taxes, I decided to give taxr.ai a try. Holy crap - what a difference! I was deducting waaay too little on my rental income. The system caught that I wasn't properly calculating my square footage allocation (I was just doing a simple room count, which shortchanged me) and showed me how to properly document my utilities split. It also explained exactly how to handle depreciation with step-by-step instructions that actually made sense! My favorite part was when it flagged that I could deduct a portion of my homeowner's insurance and property taxes - I had completely missed those. Ended up getting almost $900 more back than I expected. Seriously worth checking out if you're renting rooms.

If you're having trouble getting answers about your rental tax situation, you might want to call the IRS directly. I know, I know - sounds terrible, right? I spent DAYS trying to get through to someone at the IRS last year about this exact situation. Kept getting disconnected or waiting for hours. Then I found https://claimyr.com through a friend and you guys - it actually works. Used their service at https://youtu.be/_kiP6q8DX5c and got a call back from an actual IRS agent in about 45 minutes. The agent walked me through exactly how to handle room rentals in my primary residence, including the depreciation calculations and which forms to use. Saved me so much stress!

Ok I need to publicly admit I was wrong. After posting that skeptical comment, I decided to try Claimyr anyway because I was desperate for help with my rental property questions. I figured what's the worst that could happen? Well, I got a call back in about an hour connecting me to an actual IRS representative. I almost fell out of my chair! The agent spent almost 20 minutes with me going through exactly how to calculate depreciation on my partially-rented property and confirmed that I was right about needing to recapture that depreciation when I sell. They also explained that I needed to file Schedule E instead of Schedule C for my room rentals, which I had completely wrong. Saved me from a potential audit headache. Seriously surprised this service actually delivered what it promised.

Something nobody mentioned yet - make sure you check your local zoning laws and HOA rules! I started renting out rooms in my house and got slapped with a fine from my HOA because our covenants had restrictions on rentals under 30 days. Even though these were longer-term rentals, I had to get special permission. Some cities also have ordinances about how many unrelated people can live in a single-family home. Just something to check before you get too far into the tax planning!

Regarding question #3 about capital gains - be careful here. Yes, you can still claim the primary residence exclusion when you sell ($250k/$500k), BUT any depreciation you've taken must be "recaptured" and taxed at 25% when you sell, regardless of the exclusion. This catches a lot of people by surprise! So if you've taken $20k in depreciation deductions over the years, you'll owe $5k (25% of $20k) when you sell, even if the sale would otherwise be fully excluded from capital gains tax.

One thing I'd add to all this great advice - make sure you're keeping really detailed records of everything! I learned this the hard way when I got audited on my room rental situation. Keep receipts for all your expenses (utilities, insurance, maintenance, etc.), track exactly how much rent you collect each month, and document the square footage or room allocation you're using for your deductions. I created a simple spreadsheet to track monthly rental income and expenses, and took photos of the rented rooms with measurements. Also, consider opening a separate bank account for your rental income and expenses - it makes everything much cleaner come tax time. The IRS loves good documentation, and if you ever get questioned about your deductions, having everything organized will save you a lot of headaches. The depreciation recapture issue that @b7a3f4da667a mentioned is real, but don't let it scare you away from taking the deduction. The tax savings now usually outweigh the recapture cost later, especially with inflation. Just factor it into your long-term planning!