Maya Chen
If you own a house and have a roommate who pays you rent, you may need to report this income on your tax return. The tax rules that apply to landlords who rent out entire properties also apply to you. This means you must report the rent you receive as income, and you can deduct certain expenses that arise from your rental activity. However, this may not be necessary if your roommate is your life partner or a family member who meets IRS requirements for a qualifying person. If you and your roommate split the rent and utility bills evenly, the IRS considers this a shared expense and it is not considered income.
| Characteristics | Values |
|---|---|
| Roommate's rent considered as income | Yes |
| Reporting to IRS | Yes |
| Tax deductions | Yes |
| Reporting on Schedule E | Yes |
| Reporting as business income | Yes |
| Reporting as capital gains | No |
| Reporting as net zero | Yes |
| Reporting as shared expenses | Yes |
| Roommate as life partner | Report as "Married, filing jointly" |
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What You'll Learn
If you're renting to a partner or relative
If you are renting to a partner or relative, the Internal Revenue Service (IRS) may be lenient about not treating the money received as rental income. However, it is still considered income, and all income that is not specifically declared non-taxable is taxable.
If your partner or relative is paying less than the fair market value, it may be considered a cost-sharing arrangement rather than rental income. In this case, you may not need to report it as income, and it may be treated as sharing expenses. This is more likely to be the case if you are renting to a family member rather than an unrelated roommate.
If the rent you charge is higher than your costs minus personal use (such as mortgage, utilities, and taxes), then you may have taxable income. For example, if you have a two-bedroom house and your partner or relative has full privileges of one bedroom and half the garage, it could be considered a 50/50 split. If they are paying less than 50% of the costs, you may not need to report it as income.
It is important to note that the law does not care what you call the arrangement. Lying about it could be considered tax fraud. If audited, the IRS may consider the money received as rental income and require you to pay taxes on it. Therefore, it is essential to understand the tax laws in your state or country and consult a tax professional if needed.
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When your roommate contributes to household expenses
If you own a house and have a roommate who contributes to the household expenses, the treatment of this income for tax purposes depends on various factors. Firstly, it is important to determine whether the roommate is paying you rent for the use of a room in your home, or whether they are simply contributing to shared household expenses. If the latter is the case, and there is no landlord-tenant relationship, then this may not be considered rental income and may not need to be reported as income on your tax return. In this scenario, your roommate is simply reimbursing you for their share of the expenses.
However, if your roommate is paying you rent for the use of a room in your home, this is generally considered taxable rental income that you must report to the IRS or other relevant tax authority. This is true even if your roommate is your friend, partner, or family member. The tax rules apply to you in a similar way as they do for landlords who rent out entire properties. You are required to report this rental income on your tax return, typically on Schedule E.
It is important to note that even if your roommate is not paying rent but is contributing disproportionately to the household expenses, this may still be considered rental income and should be reported accordingly. For example, if your roommate pays for more than their share of the utilities or other expenses, this could be considered outside the definition of "shared expenses" and should be treated as rental income.
When reporting rental income, you can also claim deductions for various expenses related to the rental activity. These may include repairs, improvements, utilities, mortgage interest, homeowners' insurance premiums, and depreciation on the rented portion of your home. These deductions can offset your taxable rental income, potentially reducing your overall tax liability.
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Reporting rental income when buying a new house
If you are planning to buy a new house and you rent out your current property, you will need to report your rental income when applying for a mortgage. Lenders will want to see proof of your rental income and expenses, and this will impact your ability to secure a loan.
Rental income is any payment received for the use or occupation of property. This includes advance rent, which is any amount received before the rental period it covers. For example, if you sign a two-year lease and receive the rent for both years upfront, you must include the total amount in your income for that year. Security deposits used as final rent payments are also considered advance rent. If you keep a security deposit because a tenant breaks the lease, this is also included in your income for that year.
If you own a rental property, you must report all rental income from that property. If you share ownership, you must report your portion of the rental income. If you are renting out a room in your home, and your roommate pays you a disproportionate amount of rent for the space they occupy, you must claim this as rental income. However, if you and your roommate split the rent and utility bills 50/50, the IRS considers this a "shared expense", and you do not need to report it.
When reporting rental income, you can deduct certain expenses, such as mortgage interest, property tax, operating expenses, depreciation, and repairs. You can also deduct the cost of improvements, such as a new coat of paint or replacement carpeting, but only a percentage of these expenses are deductible in the year they are incurred. You can also deduct a portion of your utility and mortgage payments as rental expenses. To calculate this, divide the square footage of the rental space by the square footage of your home to determine the percentage of your home that is rented out.
It is important to accurately report your rental income and expenses to avoid tax evasion. While you may choose not to depreciate your rental property, this could be a financial mistake as it is a way to recover your original acquisition costs and the cost of improvements.
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Deducting rental expenses
If you receive rental income from renting out a dwelling unit, you may be able to deduct certain rental expenses on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.
For example, if you pay for repairs to keep your property in good working condition, these expenses can be deducted from your rental income. Likewise, operating expenses, such as salaries of employees or fees charged by independent contractors (e.g., groundskeepers, bookkeepers), are also deductible.
If your tenant pays any of your expenses, such as utility bills, you must include the amount in your rental income. However, you can deduct these expenses if they are considered deductible rental expenses.
When determining how much of your expenses are deductible, you can allocate them between rental and personal use. If you are renting out a room in a home that you live in, you can calculate the fraction based on square footage. For example, if your roommate is renting 1,500 square feet and the total living area is 4,500 square feet, then one-third of your expenses (such as mortgage interest, utilities, or real estate taxes) can be allocated as rental expenses.
It is important to note that deductible expenses are limited to rental income. This means that if your rental expenses exceed your rental income, you cannot use the excess expenses to lower the tax owed on your other income. Additionally, if you are a cash basis taxpayer, you deduct your rental expenses in the year you pay them.
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When to report as a business
Whether you need to report your roommate's rent as income depends on a few factors. Firstly, if you are renting out a room in your home, you must claim the money received as rental income on your tax return. This is the case even if your roommate pays a disproportionate amount of rent for the space they occupy, as this falls outside the definition of "shared expenses".
If your roommate is contributing to household expenses, such as mortgage payments, this may not be considered rental income. However, if your roommate's payments go towards paying off the principal of the mortgage, this should be declared as income and taxed accordingly.
Now, onto the question of when to report this income as a business. The IRS considers rental income to be any payment received for the use or occupation of property. If you own rental property, you must report all rental income on your tax return. This includes advance rent, amounts paid to cancel a lease, and expenses paid by the tenant. You can generally deduct rental expenses, such as mortgage interest, property taxes, operating expenses, and repairs, from your rental income.
To qualify as a rental business for tax purposes, you must be earning a profit from your rental activity and working at it regularly and continuously. There is no specific number of properties you must own for it to qualify as a business. Even if you hire a manager or own just a partial interest in the property, you can still be considered a business.
If you are seeking additional tax deductions, you may want to consider the IRS's safe harbor rule. To qualify, you must perform a total of 250 hours of real estate rental services per year, keep records of services performed, and maintain separate books for income and expenses for each rental enterprise. This rule is optional and is not necessary if your rental activity already qualifies as a business.
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Frequently asked questions
Yes, if you are the roommate who pays the landlord directly and receives reimbursement from the other party, you must report this as income. Ask your roommate to sign a receipt or write a memo on their cheque to specify that the money is reimbursement for their half of the rent or utility bill.
Yes, the rent you receive is taxable income that you must report to the IRS. However, you can deduct certain expenses, such as repairs or improvements made to the rented space.
If you live in a state that accepts common-law marriage, the IRS will accept a filing status of "Married, filing jointly". In this case, you may not need to report your roommate's rent as income.
Yes, even if you are charging your roommate below market rate, the income is still taxable and should be reported. However, you can deduct certain expenses related to the rental, such as utility or mortgage payments.
Yes, if you rent out a room in your home, you must report the money received as rental income on your tax return. All expenses relating to the home must be adjusted based on the square footage of the rental space.
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