Spare room rental tax after 60: what you actually owe

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You cleaned out the spare bedroom. Somebody's paying you six hundred a month to live in it. And now there's a question sitting in the back of your mind that you'd rather not think about.

Does the government want a piece of this?

Usually yes. But the full answer has corners in it that work in your favor, and most people renting a room have never been told about any of them. The tax you actually owe is often far less than the rent you collected — sometimes nothing at all.

This is the long version. Use the contents to find your part.

1. The 14-day rule

Start here, because almost nobody knows it exists.

If you rent out space in your home for fewer than 15 days in the year — 14 days or less, total — you don't report that income at all. Not a line on your return. The money is simply yours.

The tradeoff is that you can't deduct any expenses against it either. For a handful of days, that's no loss.

Fourteen days and you're outside the tax system. Fifteen and you're in it. There's no partial credit and no rounding.

Who this actually helps: somebody renting a room out during a big event week in town. A family reunion. One stretch in the fall when the college is short on housing. If your renting is occasional rather than ongoing, count your days carefully before you agree to one more night.

Everything below applies to everyone past 14 days.

2. You're taxed on profit, not on rent

Here's the sentence that changes the picture for most people.

The number you pay tax on is not the rent you collected. It's what's left after your expenses come out.

Say you collect $7,200 for the year. That is not $7,200 of taxable income. Against it you can put a share of your mortgage interest, your property tax, your insurance, your utilities, your repairs, and depreciation. For a lot of people the remainder is a few hundred dollars. Some years it lands near zero.

This gets reported on Schedule E with your regular tax return. It's not a separate filing and it's not a business return. One extra form.

3. Figuring your percentage

Most of your expenses are for the whole house, so you have to divide them between the part you rent and the part you live in. The IRS wants a reasonable method, consistently applied.

Two common ones:

By square footage. The rented room is 180 square feet. The house is 1,800. That's 10 percent.

By number of rooms, if the rooms are roughly comparable in size. Five rooms, one rented, that's 20 percent.

Square footage is usually the more defensible of the two, and it's easy to document — measure once, write it down, keep the note.

Shared space is a judgment call. The tenant uses the kitchen and the bathroom too. Some people count only the private room, which is conservative and safe. Others add a share of the common areas the tenant genuinely uses. Pick a method you can explain in a sentence, write down how you arrived at it, and use the same one every year. What causes trouble isn't picking one method over another — it's changing methods whenever the answer is inconvenient.

4. What you can deduct

Two categories, and the difference matters.

Whole-house expenses — deduct your percentage:

• Mortgage interest
• Property taxes
• Homeowners insurance
• Utilities: electric, gas, water, trash
• Internet, if the tenant uses it
• Lawn care, pest control, general maintenance
• HOA fees

Directly related to the rental — deduct in full:

• Repairs inside the rented room
• A lock for that door
• Advertising the room
• Tenant screening and background check fees
• Legal or accounting fees for the rental
• Furnishings for that room

A note on mortgage interest and property tax: if you already itemize deductions, watch that you're not counting the same dollar twice. The rental share goes on Schedule E, and only the personal share belongs on Schedule A. Tax software usually handles this, but it's worth knowing what it's doing.

5. Repairs versus improvements

This distinction shows up on every rental return and it's the one people get wrong.

A repair keeps things working as they were. Fixing a leaky faucet, patching drywall, repainting. You deduct it this year, in full.

An improvement adds value or extends the life of the property. A new roof, a bathroom remodel, new windows. You can't deduct it this year — you add it to your basis and depreciate it over time.

The practical test: are you restoring something to how it was, or making it better than it was? Fixing the furnace is a repair. Replacing it with a new one is an improvement.

People deduct improvements as repairs because it feels better in the short run. It's a common audit trigger and it isn't worth it.

6. Depreciation, and why skipping it doesn't help

Depreciation lets you deduct a portion of the value of the rented space each year, spread over 27.5 years for residential rental property.

Important: it's based on the building, not the land — land is never depreciated. So you start from what you paid for the house, subtract the land value, take your rental percentage of what's left, and divide across 27.5 years.

Now the part that surprises people, and the reason not to skip it.

When you eventually sell, the tax law looks at depreciation “allowed or allowable.” Read that second word carefully. The bill is calculated on the depreciation you were entitled to take — whether or not you ever took it.

Picture what that means in practice. You rent a room for six years. Nobody mentions depreciation, so you never claim it. You overpay your taxes for six straight years. Then you sell the house, and the IRS settles up as though you'd claimed it every one of those years.

Skipping it doesn't protect you. It costs you twice.

So if you're renting the room and reporting the income, take the depreciation. There is no version of this where leaving it on the table works in your favor.

7. The limit that catches room renters

Here's a rule specific to renting part of a home you also live in, and it catches people who expected a loss to shelter their other income.

Because the property is your residence, your rental deductions are generally limited to your rental income. You can zero out the rent. You usually cannot create a loss that offsets your pension or your investment income.

So the realistic best case for most room renters is taxable rental income of zero. That's a good outcome. Just don't go in expecting the room to produce a paper loss that lowers the rest of your tax bill.

There's an important split in what happens to the expenses you couldn't use, and it depends on which situation you're in.

Renting at fair market rent, for profit. The unused expenses generally carry forward to future years, where later rental income may absorb them. Deferred, not lost.

Not renting for profit — charging well below market, or an arrangement that's really two people splitting costs. Here the deductions are capped at the rent collected and there's no carryforward. The income still gets reported in full. The unused write-offs are simply gone.

Which side you're on is decided by the arrangement itself, not by what you call it. Section 12 goes into this further, and it's worth reading if you're charging a friend or a relative less than the room is worth.

8. Does this cost you the tax break when you sell?

This is the question that worries people most, and for a room inside your home the answer is better than expected.

When you sell your main home, you can generally exclude up to $250,000 of gain ($500,000 if married filing jointly), provided you meet the ownership and use tests — broadly, that you owned and lived in the home for at least two of the five years before the sale.

For rental space inside your living area — a spare bedroom is the IRS's own example — you do not have to split the gain between the rented portion and the rest. The exclusion applies to the whole thing.

What does come back is depreciation. Any depreciation claimed for periods after May 6, 1997 must be recaptured and reported. That portion can't be excluded, and it's taxed at a rate of up to 25 percent as unrecaptured Section 1250 gain.

So the shape of it: renting a bedroom doesn't cost you the exclusion. It creates a smaller, separate bill on the depreciation you took along the way — which is the deduction you already enjoyed each year. It's a settling up, not a penalty.

9. A room in your house is not a separate unit

Everything in section 8 depends on the rented space being within your dwelling unit.

Within the living area — a spare bedroom, a finished basement you can walk down into, an attic room. No allocation of gain required.

Separate from the living area — a detached guest house, a garage apartment with its own entrance, a converted unit that functions independently. This is treated differently, and gain allocable to that portion generally does not qualify for the exclusion.

The dividing line is real and it can be worth a great deal of money. If you're weighing whether to convert the garage or put a door on the outside of the basement, understand the tax consequence before you build it, not after. A separate entrance may make the space easier to rent and harder to sell tax-free.

If your situation is anywhere near this line, this is the point to bring in a professional.

10. Does it count against your Social Security?

Two separate questions here, and people run them together constantly.

The earnings limit. If you claimed Social Security before full retirement age, benefits can be withheld when you earn too much. But that test looks only at wages and self-employment income. Ordinary rental income is neither. Renting a room to a quiet tenant generally does not count against the earnings limit at all.

Taxation of your benefits. Different rule entirely. This one looks at your total income — including your net rental income — plus half your Social Security. If that combined figure crosses certain thresholds, a portion of your benefit becomes taxable.

So: the room probably doesn't reduce your Social Security check, but it may increase the taxable share of it. Two rules, two different outcomes.

One thing to watch. If you cross from landlord into providing services — see section 11 — the income can be recharacterized as self-employment, and then it does count against the earnings limit.

11. Do you owe self-employment tax?

Usually no, and this is a meaningful savings.

Ordinary rental income is generally not subject to self-employment tax. You're renting space, not running a business.

That changes if you provide substantial services to the occupant — the kind of thing a hotel or bed and breakfast does. Daily cleaning of their room, meals, linen service, concierge arrangements. At that point the IRS may treat it as a business, which brings self-employment tax with it, and may also bring it back into the Social Security earnings test.

Providing heat, water, trash pickup, and normal building maintenance does not cross that line. Those are just what a landlord provides.

The short-term rental world is where this gets complicated. A long-term tenant in a spare bedroom is nearly always the simple case.

12. Renting cheap, or renting to family

Two situations that change the rules, and both are common among retirees.

Renting below fair market value. If you charge a friend $200 for a room worth $700, the IRS may treat it as a not-for-profit rental. You still report every dollar that comes in. But your deductions are capped at the rent you collected, and nothing carries forward to a later year. The income stays; the write-offs mostly go away.

There's nothing wrong with either arrangement. They just aren't the same thing, and it's far better to know which one you're in before the year ends than after.

Renting to a relative who uses it as their main home. There are specific rules here, and days rented to a family member at below-market rent can be counted as personal use days rather than rental days — which changes the math considerably.

None of this means you shouldn't help family. It means don't assume the tax treatment matches what it would be with a stranger paying market rent. Ask first.

13. What to keep records of

Not much, but keep it consistently. A folder and ten minutes a month is enough.

• The measurement. Square footage of the rented space and of the house. Write it down once.
• Rent received. Dates and amounts.
• The days. Especially if you're anywhere near the 14-day line.
• Every bill you'll allocate. Mortgage statement, property tax, insurance, utilities.
• Receipts for repairs, noting whether it was the room or the whole house.
• The purchase records for your home, including the land value split, for depreciation.
• A running depreciation total. You will need this at sale, possibly decades from now. This is the one people lose, and it's the most expensive one to lose.

If you're paid through a platform, expect a 1099-K and make sure what you report accounts for it.

Also check your side of things beyond taxes: your homeowners insurance may not cover a tenant, your local ordinances may have rules about renting rooms, and if you have a mortgage or an HOA, there may be terms about occupants. Those are separate from the tax question and they've caused more trouble for more people than the IRS has.

14. The things this article can't answer for you

Three, honestly:

Whether your space is “within the dwelling unit.” Most spare bedrooms clearly are. Basements and converted garages depend on the specifics of your house, and the answer moves real money.

Your depreciation basis. This depends on what you paid, what the land was worth, and what improvements you've made since. It's arithmetic, but it's arithmetic on your particular property.

Whether you're providing substantial services. The line between landlord and innkeeper isn't a bright one, and where you fall changes whether self-employment tax applies.

For a straightforward spare bedroom with a long-term tenant, the picture in this article is usually the whole picture, and tax software will handle it. For anything involving a separate entrance, a family member, or services you provide — one appointment with a preparer is worth the fee. Ask them specifically about the dwelling unit question. It's the one with the largest number attached to it.

Sources: IRS Publication 527 (Residential Rental Property), Publication 523 (Selling Your Home), and Publication 946 (How To Depreciate Property). Tax rules change; confirm current treatment at irs.gov before filing.

Retiree Blueprint is about practical income from what you already own. This is general information, not personal tax advice.