[Jodyboy]

I am renting out a room to a friend in my home in NYS. Is this rent paid to me taxable? If so, what happens if I don't report it to the IRS?

[JudyKayTee]

Yes, it's taxable income to you. Of course, your expenses in connection with the rental are also deductions.

If you don't report income to the IRS and get caught you get charged interest and penalties on the money and can be arrested.

[MukatA]

You must report rent income on schedule E (Form 1040) part I to report rental income, expenses and depreciation. If you rent part of property, you must divide your expenses on rental part and personal use part as if they are separate parts.

[AtlantaTaxExpert]

Sorry, in this case, both JudyKayTree and MukatA are wrong.

The renting of a room that is part of your home or apartment is NOT tyaxable, simply because the expenses associated with the rental almost ALWAYS exceeds the rent. Since such rentals CANNOT show a deductible loss, the IRS does not even want you to put it on your return.

[JudyKayTee]

Sorry, in this case, both JudyKayTree and MukatA are wrong.

The renting of a room that is part of your home or apartment is NOT tyaxable, simply because the expenses associated with the rental almost ALWAYS exceeds the rent. Since such rentals CANNOT show a deductible loss, the IRS does not even want you to put it on your return.

I think we've talked about this before. Had this situation in my family. Can you give me the portion of the tax code that covers it?

As it happens my mother rented a room to a student, didn't declare it, somehow or other IRS got involved and she had to file an amended return and pay a penalty for not reporting income.

The exact section/statute would be most helpful.

[AtlantaTaxExpert]

Sorry I took so long to answer; it's been somewhat hectic for the past week.

Judy, I cannot provide the exact section of the IRC, but if you review Chapter 9 of IRS Pub 17 or download IRS Pub 527, it becomes obvious from the examples that the rental of a room in your mother's home will always fall in the category of "Dwelling Unit Used as Home". That being the case, the expenses associated with the room rental (pro-rated share of utilities/taxes/mortgage/repairs, etc.) are limited to the amount equal to the rent collected.

BOTTOM LINE: You CANNOT show a loss (paper or otherwise) associated with the rental of a room in your home.

Since that is the case, I have always held the position that claiming such rent on a Schedule E that shows NO taxable income or NO tax-deductible LOSS is a waste of everyone's time and effort and needlessly complicates the tax return. Conversations I have had with numerous IRS officials has confirmed this position, provided I could show (if asked) that the expenses clearly exceeded the rent received.

Now, as I understand it, your mother DID rent the room to the student, but failed to report the income. I suspect that the student somehow claimed the rent as a deduction (international graduate students do this routinely, as do students on internships) and that is how the IRS determined she had taxable rental income. They then sent her an adjustment notice, adding the income to her Adjusted Gross Income without factoring in allowable rental costs. I suspect she probably just accepted the IRS ruling and failed to amend her return to show that her expenses exceeded her income.

If this happened with the last few years (2007 or later), we can fix it with an amendment and get her money back, plus the penalties and interest. Email me at [email protected] if you wish to pursue it.

[JudyKayTee]

What happened is - my mother rented a room to a student. I'll say 2004-2005, not after that. (I thought it was dangerous, the student was supposed to help out as part of the rent and did not, it made no sense.) At any rate, the student filed bankruptcy toward the end of the tenancy (my mother says 2005) and on the Petition listed "rent" as an expense with the amount she was paying to my mother. Bankruptcy Court turned the info over to IRS (somehow and for whatever reason), my mother got audited and she owed taxes for those two years.

I didn't handle this whole business; my sister did so I am relying on my mother's memory for the details.

You have extended a very kind offer and I appreciate it. I am sending your response to my sister and she can decide how to proceed.

Thanks.