If you own your home and decide to rent out a room or part of it to a roommate, you’ve officially entered the world of “partial home rentals.” While this can be a smart way to offset mortgage or utility costs, it also introduces new tax considerations under IRS Publication 527, Residential Rental Property. Here’s what you need to know.

1. The Split Between Personal and Rental Use

When you rent out part of your home—say, a spare bedroom—you’re essentially using part of the property for business (rental) and part for personal living.
That means you must divide your expenses between these two uses.

Typical allocation methods include:

• Square footage: Divide total square feet rented by total square feet of the home.
• Number of rooms: If all rooms are roughly equal in size, divide expenses based on how many rooms are rented versus total rooms.

For example, if you rent out one room in a four-room house, 25% of eligible expenses (mortgage interest, property taxes, utilities, etc.) may be deductible against rental income.

2. Rental Income Must Be Reported

Any money your roommate pays you—rent, utilities, or shared costs—is considered rental income. You must report this income on Schedule E (Form 1040), even if it’s from a friend or family member.

However, if the roommate is merely reimbursing you for actual household expenses (for example, paying exactly half the utilities), and there’s no profit motive, it may not count as rental income. But once you charge rent above cost-sharing, the IRS treats it as taxable.

3. You Can Deduct Part of Your Expenses

You can generally deduct the rental portion of:

• Mortgage interest and real estate taxes (also partly deductible as itemized personal expenses)
• Utilities and repairs related to the rented space
• Depreciation for the rented portion of the home

Depreciation can get tricky. You’ll need to calculate the basis of the home, allocate it between personal and rental use, and claim annual depreciation on the rental portion only.

4. Improvements vs. Repairs

Repairs that benefit the rented area—like repainting your roommate’s room—are fully deductible (in proportion to the rented space).
But improvements that add long-term value to the entire home—like installing a new roof or HVAC system—must be depreciated over time rather than deducted in one year.

5. Be Mindful of Personal Use Limits

If you also use the rented space personally (say, it doubles as a guest room sometimes), you may have to prorate further and your deductions could be limited.
The IRS looks closely at how many days each part of the home is used for rental versus personal purposes to determine how much you can deduct.

6. When You Sell the Home

Here’s a big one: If you eventually sell your house, the portion used as a rental isn’t eligible for the full home sale exclusion (up to $250,000 or $500,000 for joint filers).
You’ll also have to recapture depreciation taken on the rental portion—meaning pay tax on it when you sell.

Takeaway

Renting part of your home is an excellent way to generate income, but it also transforms you—at least in part—into a landlord. Publication 527 helps you navigate the deductions, allocations, and reporting requirements so you stay compliant while maximizing tax benefits.

If you’re unsure how to allocate expenses or handle depreciation, a tax professional can help you structure things correctly and avoid IRS headaches later.

At Dino Tax Co, we help clients navigate tax matters ranging from unfiled returns to IRS letters and levies and everything in between with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call or text (713) 397-4678 or email davie@dinotaxco.com. We’re here to help you take the next step.