Posted by Abundant Wealth Planning LLC

Tax Implications of Renting a Room in Your Home

Tax Implications of Renting a Room in Your Home

Owning a vacation home or a main dwelling in a location frequented by vacationers opens you up to income options like vacation rental, or temporary rental.  With online markets like Airbnb and VRBO, it’s easier than ever to rent out dwelling space.  If you rent your personal space for temporary use, the professionals at Abundant Wealth Planning, LLC in Mountainside, NJ can help you with your tax filing this season.

If you use a space you’ve rented for personal use, you are required to divide your expenses between rental use and personal use.  Your rental expenses should be figured out by using a percentage of your total expenses, calculating the total number of days the unit is used and dividing that by the total number of days rented at a fair rental price.  

A dwelling unit is considered to be a house, apartment, condominium, mobile home, boat, vacation home, or similar property, including structures belonging to the dwelling unit.  In order to qualify, the unit should have sleeping space, a toilet, and cooking facilities.  It does not include hotels, motels, or inns.  

Whether a dwelling is considered a home also affects the expenses you can deduct.  This depends on how many days during the year you use the space for personal use.  If you used the unit as a home, but rented it for less than fifteen days during the year, you will have different guidelines.

You can rent out all or part of your home or apartment for up to fourteen days per year and all the rental income you receive is tax-free, no matter how much you earn.  In order to qualify, you must use the home for personal use for more than 10% of the total days it is rented to others, or for more than fourteen days.  If you rent out only a room, and live in the rest of the space, you will qualify for personal use.  Being able to rent tax-free means that you do not get to deduct any expenses or depreciation, since these are deducted from the taxable rental income only.

If you rent your main residence for more than the fourteen day limit, and you live there fifteen days or more during the year, you will have to pay income tax on your rental income.  To do this, you’ll file a Schedule E.  First, you’ll report your rental income for the year, so make sure that you keep track of the days you rented the apartment, room, or home.  Once you deduct your rental expenses, you will pay income taxes on the profit left over.  If your expenses are more than the total income, you will pay zero, but you cannot deduct the loss and apply it to your refund.

Your direct rental expenses, which apply only to renting, are 100% deductible.  These include fees and commissions you pay an agency or agent, advertising, credit and background checks, insurance, cleaning services or cleaning costs, repairs, and depreciation using the previously mentioned method of measuring the days rented and limiting the costs to the rental portion of your home.  Using the same formula, you can also deduct a portion of your expenses to own and operate your entire home, such as mortgage interest and real estate taxes, utilities, and home maintenance.  Again, this is true for rental space within your own home or within a property you divide between personal and rental use.  

If you only rent a room or space within your home, you can deduct a proportion, based on the number of rooms you’ve rented in comparison to the total rooms in your home.  

There are a few cases in which your personal use may not be enough to claim rental income as a part of a personal use property.  If you own a timeshare, for example, you must report your rental income and expenses according to the fourteen day rule.  However, your days rented are counted for the entire year, including the time that other owners rent the property. So, renting your timeshare property is almost always taxable, unless you can somehow prove that the property was rented less than fifteen days per year total by all owners.  You also would need to use the property as a home, meaning that you would have to stay there at least two weeks.  Because of these limitations and lack of provable guidelines, you are best off claiming a timeshare rental as taxable income.  Remember, the reason that you do not meet the exception for taxable income is because you do not know if you meet the requirements of rental, since you are taking others' rented time into consideration.  However, you are not responsible for claiming other timeshare owners’ income.

Personal use can also be denied if your classification changes.  In rare cases, you could be facing a classification of a bed and breakfast or hotel by the IRS.  This will typically occur if you have rooms in your home which are solely for paying customers and that you never use for personal use.  If you offer regular cleaning or maid service, this could also change the classification.  If you are classified as a bed and breakfast or hotel, you will file as a business rather than claiming rental income from a personal use space.  If there is a reason that you could be classified as a business, contact Abundant Wealth Planning, LLC to make sure you are filing properly.  There are benefits and downfalls to filing this way, so ensuring that you claim all of the benefits associated with your business is important.

Renting your home for parts of the year, or allowing people to rent space within your home, can be lucrative.  However, knowing how and when you need to pay taxes on that income is important to ensure that you are filing responsibly.  If you have rented property at any time during the year, contact Abundant Wealth Planning, LLC in Mountainside, NJ to discuss your options for filing.


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