I need to modify my mortgage, but was told I need to show more income. A friend has moved in and is renting my basement from me. If I claim his rent for mortgage purposes, do I have to claim it on my taxes as additional income? Do I need to show a lease?

Of course it would be income!

But much of what you spend to produce income eventually becomes a deduction from your income. The complicated parts are calculating what expenses have to be distributed over multiple years through depreciation and what portions of the expenses for the entire building are for the rental space (deductible) vs your living area (usually not deductible except for mortgage interest). Then there's capital gains (or loses)...

1. First you need to divide mortgage interest in two parts -- one your rented portion and one you're your home. Your home mortgage, you can deduct as itemized deduction.

2. Now file schedule E. Report rent income and claim expenses including mortgage part for the rented space. You must also deduct depreciation for the rented part.