Renting Out a Spare Room? Essential Tax Rules for House Hackers

“House Hacking”—renting out a room to cover your mortgage—is a brilliant wealth strategy. But from a tax perspective, it changes everything. Your home is no longer just a home; it is a hybrid asset (part personal, part business). This unlocks magical deductions: you can now write off a portion of your electricity, insurance, and repairs. However, it also invites the IRS into your living room via Schedule E. Here is how to calculate your deductions correctly without triggering an audit or a future tax bomb.

BMT Tax Team BMT Tax Team · 📅 Feb 2026 · ⏱️ 6 min read · TAX › RENTAL
The Form
Sch E
Supplemental IncomeAction
Key Math
Sq. Ft. %
Prorate EverythingFact
Warning
Recapture
Tax on SaleWarn
Floor plan visualization showing how to calculate tax deductible percentage for house hacking based on square footage

The Proration Map: Measure the square footage. Only the “Rental Zone” (Green) gets tax deductions. The rest is personal use.

Image Source: bestmoneytip.com

1. The Math: How to Split Your Bills

You cannot deduct 100% of your electric bill just because you have a tenant. You must prorate.

The Square Footage Method
• Total House: 2,000 sq. ft.
• Rented Room: 300 sq. ft. (Exclusive Use)
• Result: 300 ÷ 2,000 = 15%.
👉 You can deduct 15% of your Whole-House Expenses (Electricity, Water, Internet, HVAC repair, Home Insurance).

*Direct Expenses (e.g., painting only the tenant’s room or fixing their toilet) are 100% deductible.

2. Depreciation: The Phantom Deduction

This is the most confusing part. You get to deduct the “wear and tear” of the rented portion of your home over 27.5 years.

Aspect The Good News The Bad News
Now (Tax Time) Lower Taxes Complex Math
Later (Sale) None Recapture Tax (25%)
CRITICAL WARNING
You CANNOT skip depreciation. Some people think, “I won’t claim it so I don’t have to pay it back later.”
Wrong. The IRS law says you owe the tax on depreciation “allowed or allowable.”
This means if you could have taken it but didn’t, you STILL owe the tax when you sell. Always claim it!

3. Where Does It Go? (Schedule E)

You do not put this on the “Other Income” line. It goes on Schedule E (Supplemental Income and Loss).

  • Income: Rent received.
  • Expenses:
    – Mortgage Interest (Prorated 15%)
    – Property Tax (Prorated 15%)
    – Utilities/Repairs (Prorated 15%)
    – Depreciation (Prorated 15%)
  • Net Result: Often, the depreciation drives the net income to zero or a loss, meaning you pay $0 tax on the rental income.

4. Can I Deduct a Loss Against My Job Income?

If your expenses > rent, you have a “Passive Loss.” Usually, you can’t use this to lower taxes on your W-2 job income. BUT, there is an exception.

✅ Mom & Pop Exception
If your Modified AGI is under $100,000, you can deduct up to $25,000 of rental losses against your other income (W-2).
(Phaseout: The benefit shrinks between $100k-$150k income and disappears above $150k).

5. Frequently Asked Questions

What if I rent to a friend for cheap?
Dangerous. If you rent below “Fair Market Value,” the IRS considers it personal use. You must report the income, but you cannot deduct any losses or expenses beyond the income amount. Always charge market rent.
Does this affect the $500k Sale Exclusion?
Slightly. As long as the rented area is within the same dwelling unit (not a separate guest house), you typically still qualify for the Section 121 Exclusion (Article 507), EXCEPT for the depreciation you claimed. You’ll pay tax on the depreciation recapture, but the rest of the gain remains tax-free.