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If I rent out two rooms in my main home, do I need to declare this as rental income?

Yes. Where you report the income depends on whether you rent the property to make a profit. Report it like this:

  • If you rent the property for profit, you'll report all income and deduct all expenses on Schedule E.
  • If you don’t rent your property to make a profit, report the income on Form 1040.

If you're not trying to make a profit and you itemize deductions, you can include expenses like these on Schedule A:

  • Mortgage interest
  • Qualified mortgage insurance premiums
  • Real estate taxes
  • Casualty losses

You can deduct other rental expenses, like advertising, only up to the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for this year.

Claim these expenses as miscellaneous itemized deductions. You can deduct them only if they're more than 2% of your adjusted gross income (AGI). Add these expenses to certain other miscellaneous itemized deductions. Do this to get to the 2% AGI limit.

You're renting to make a profit if both of these are true:

  • Your rental income is more than your rental expenses.
  • You do so for at least three out of five consecutive years.

Report your rental income on Schedule E.

You’ll have to divide certain expenses between:

  • The part of the property used for rental purposes
  • The part of the property used for personal purposes

Treat them as though you actually had two separate properties.

For the part of the property you used for rental purposes, you can deduct expenses like these as rental expenses:

  • Home mortgage interest
  • Qualified mortgage insurance premiums
  • Real estate taxes

You can also deduct part of other expenses that you usually can't deduct. These include expenses like electricity or painting the outside of the house.

 

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