When you welcome a houseguest into your home and receive rent, this income is considered rental income by the IRS. Even if you’re not collecting a traditional rent check, the money you receive counts toward your taxable income.
But don’t worry—there are ways to offset this with some savvy tax deductions.
One of the great advantages of renting out a part of your home is that you can deduct a portion of your utility costs. This includes property taxes, electricity, water, gas, and even internet and cable service.
Here's how it works:
Calculate the Deductible Percentage: If your houseguest occupies a portion of your home and shares the common areas, you can deduct a percentage of your utility expenses.
For example, let's say you live in a 2,000 square foot home.
You rent out a guest bedroom for the exclusive use of the houseguest. This guestroom is 150 sq. feet.
You forbid them from using the master bedroom and the master bathroom which equates to 300 square feet.
For the remaining 1,550 square feet of the home, you share 50/50.
In this case, the calculation would be 150 sq. ft + (1,550/50%) = 925 sq. feet is used to generate rental income.
925/2,000 sq feet = 46.25% of the home is used to generate income.
Apply the Percentage: You can deduct 46.25% of your housing related bills (property taxes, utilities, HOA fees, etc.). That’s money saved on your taxable income.
As a homeowner, property taxes are a significant expense. The good news is that you can deduct a portion of these taxes based on the area of your home used by the houseguest.
If you live in a condo or apartment with HOA fees, part of these can be deducted too. These fees often cover maintenance of common areas, which your houseguest benefits from.
Example: If your HOA fees are $10,000 per year, you can deduct around $4,625
All of your household utilities are also deductible. Most Americans are spending $450 per month on utilities. This includes:
Electric - $150 per month
Heat/hot Water Bill (Oil/Natural gas) - $75 per month
Water/Sewer bill - $55 per month
Cable/Internet - $115 per month
In our example, you would be able to deduct 46.25% of these expense against the rental income or $208 per month
For a vast majority of homeowners, the rental income earned from home sharing will be tax free if they apply all the applicable deductions.
You can expect some utilities such as electricity and heat to go up by about 50%, but they will not double. This is because much of our energy usage is used for things such as a refrigerator, heating the common areas. Those costs will not change based on the number of people living in the home.
And other costs, such as property tax and cable/internet bill do not change at all depending on how many people live in the home.
Overall, you may see your total house related expenses increase by about 10%, but you will likely be able to deduct 45% of your expenses and see significant savings.
The homeowner receives $800 per month in rent or $9,600 per year.
You determine that the shared space in your home is equal to 45% of the home.
Your property taxes are $10,000 per year, of which $4,500 is deductible.
Your utilities amount to $600 per month, or $7,200 per year, of which $3,240 is deductible.
Your HOA fee is $450 per month, or $5,400 per year, of which $2,430 is deductible.
The Math: $9,600-($4,500+$3,240+$2,430)= -$540 - which means the federal income tax due would be $0
Navigating the world of tax deductions can be daunting, but at Home Sweet Homeshare, we aim to make it as simple as possible. Here’s a quick checklist to help you get started:
Keep Detailed Records: Maintain records of all expenses, including utilities, property taxes, and HOA fees
Use Form Schedule E: Report your rental income and expenses on Schedule E (Form 1040).
Consult a Tax Professional: Home Sweet Homeshare can share general information but for personalized advice, consider consulting with a tax professional to ensure you’re maximizing your deductions on a federal, state and local level.