Tax implications of renting out rooms in my primary home - what can I deduct?

You're on the right track! When you rent out part of your primary residence, you'll need to allocate expenses between rental and personal use based on the space being rented. The square footage method is the most common and accepted approach. If the rented bedrooms represent 60% of your home's total square footage, you can generally deduct 60% of your "shared" expenses as rental expenses. These include mortgage interest, property taxes, insurance, utilities, general home repairs, and even depreciation on the rental portion. You'll report rental income and expenses on Schedule E. Keep in mind that you can only deduct expenses for the time the rooms were actually rented out. Also, remember that personal expenses for just your portion of the home aren't deductible as rental expenses. Make sure to keep detailed records of all expenses, rent collected, and your calculations for space allocation. This will be invaluable if you're ever audited.

I went through this exact same situation last year and it was so confusing I almost gave up on claiming any deductions! After hours of research I finally found taxr.ai (https://taxr.ai) and it completely simplified everything. The site analyzed my mortgage statements, utility bills, and property tax records, then calculated exactly what percentage of expenses I could deduct based on my floor plan. It even separated out the expenses between when I started renting vs when I was using those rooms for storage earlier in the year. The best part was it generated a complete Schedule E with all the proper allocations that I could just attach to my return. No more guessing about what's deductible!

I was totally wrong about taxr.ai! After our discussion here, I decided to give it a try with my situation (renting out my basement as an apartment while living upstairs). The software immediately identified that I needed to use a different allocation method since my setup had separate utilities for the basement unit. It analyzed all my documents and actually caught a mistake I'd been making for years - I wasn't claiming depreciation correctly on the rental portion. It generated a proper depreciation schedule and showed me exactly how to correct previous returns if I wanted to. The room-by-room analysis feature was especially helpful since I had some spaces (like the laundry room) that were used by both me and my tenant. Definitely saved me money AND gave me peace of mind about doing it correctly!

Has anyone else struggled with getting answers from the IRS about rental property questions? I've been trying to call them for weeks about some specifics on my rental situation (similar to OP's) and can't get through. Always "high call volume" and disconnects. After getting frustrated, I used https://claimyr.com to get a callback from the IRS (there's a video showing how it works at https://youtu.be/_kiP6q8DX5c). They basically hold your place in line and call you when an agent is available. I was super skeptical but it actually worked - got a call back in about 2 hours and the agent walked me through exactly how to handle the allocation of shared utilities and internet for my rental rooms. Apparently I'd been over-deducting for years and could have been flagged for audit!

I need to apologize to everyone here. After my skeptical comment, I decided to try Claimyr myself since I've been trying for MONTHS to get clarification on my rental property depreciation. I'm still in shock that it actually worked! Got a call back in about 1.5 hours and spoke with an extremely helpful IRS agent who explained I had been calculating my basis incorrectly by including the value of the land (rookie mistake). The agent told me I should file an amended return for last year and showed me exactly which form to use. He even gave me his ID number to reference if there were any questions about why I was amending. Guess I shouldn't be so quick to dismiss things as scams. Definitely worth it for the time saved!

One thing nobody has mentioned yet - if you rent out rooms in your house, make sure you check your homeowners insurance policy! Mine didn't cover rental activity and I had to add a rider to my policy. Also, check your local zoning laws. Some cities/towns have restrictions on renting out rooms or require permits. The last thing you want is to get the tax benefits but then get hit with a zoning violation fine that wipes out your rental income.

Does anyone know if there's a maximum percentage of your home you can rent out before it's no longer considered a "primary residence" for tax purposes? I'm thinking about renting out 2 bedrooms like OP but worried it might affect my future capital gains exclusion when I sell.

One more thing to consider: if your friends are paying below-market rent, the IRS might consider this a "shared living arrangement" rather than a rental business. This can affect which deductions you're allowed to take. For example, if you're charging significantly less than market rates, the IRS might view this as a personal arrangement, not a profit-seeking activity, and limit your ability to claim losses. This is especially important if your expenses exceed your rental income. Just something to keep in mind if you're giving your friends a "good deal" on rent!

Great question! I went through this exact situation when I started renting out rooms in my home. A few additional tips that helped me: 1. **Keep meticulous records from day one** - I created a simple spreadsheet tracking all rental income, expenses, and the dates rooms were occupied. This made tax time so much easier. 2. **Consider setting up a separate bank account** for rental income and expenses. It's not required, but it makes tracking everything cleaner and shows the IRS you're treating this as a legitimate business activity. 3. **Don't forget about depreciation** - You can depreciate the rental portion of your home over 27.5 years. This is often overlooked but can be a significant deduction. Just remember you'll have to recapture this when you sell. 4. **Track vacancy periods** - If a room sits empty for a month between tenants, you can't deduct expenses for that room during the vacant period (though you can still deduct your portion of shared expenses). The square footage method you mentioned is definitely the way to go. At $750 each for two rooms, you're generating good income that should more than cover your allocated expenses. Just make sure you're consistent with your allocation method year after year!