Renting out a room or a home, Schedule E basics and the 14 day rule

How it works

Rent received goes on Schedule E, and the owner deducts expenses tied to the rental, including mortgage interest, property tax, insurance, repairs, utilities, and depreciation on the building. When a room in a home is rented, shared expenses are split by the share of the home rented. A home used personally for part of the year and rented for the rest has its expenses divided by days of each use, and a loss on a home with heavy personal use is limited. The 14 day rule says a dwelling rented out for fewer than 15 days in the year, that the owner otherwise uses as a home, produces no reportable income and no deductions. Rental losses are limited by the passive activity rules, with an allowance of up to this year's official passive loss allowance (not yet verified here; see the official source below) for active owners.

What it gives

Expenses tied to the rental, including a share of the mortgage interest and depreciation, offset the rent.

A home rented for fewer than 15 days, such as during a big local event, earns income that is not reported at all.

Rental income is not subject to self employment tax when no substantial services are provided.

What it costs, or where the catch is

Depreciation taken on a home is taxed back when it is sold, even if the owner never claimed it.

Short term rentals with hotel like services can be treated as a business with self employment tax.

Local rules and the lender's terms may restrict renting, apart from the tax rules.

A worked example

Ursula rents a spare room that is 20 percent of her home's square footage to a tenant for $800 a month, which is $9,600 a year. She deducts 20 percent of her $12,000 mortgage interest, $3,000 property tax, and $1,500 insurance, which is $3,300, plus depreciation on 20 percent of the building's basis, about $1,800. Her taxable rental income is $9,600 minus $5,100, which is $4,500. Her neighbor Vince rents his whole house for 10 days during a festival for $5,000 and reports none of it.

Where it goes wrong

The common miss is skipping depreciation on the rented part because it feels optional, and then owing tax on it at sale as if it had been taken.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Tax Topic 415, Renting residential and vacation property. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.