Room rental and tax implications

I have the questions regarding long-term room rental(longer than 30 days) in my primary residence. I have following questions

  1. Do i need to register with city of sunnyvale for it ?. From there website it says you need to register only for short term rental(less then equal to 30 days).
  2. Currently mortgage interest deduction is set to 750k and property tax deduction is set to 10k, can i deduct more if i am renting out a spare room in my house. Say 1/5th more assuming i rent out 1 room out of 5.
  3. Down the line when i sell the house say after 2 years , can i still keep profit of 250k/500k without paying tax on it even though i am renting a room. From IRS pub 523 it says i can

Exceptions.

The following situations of business or rental usage don’t affect your gain or loss calculations.

  • Space within the living area. If the space you used for business of rental purposes was within the living area of the home, then your usage doesn’t affect your gain or loss calculations. Examples of spaces within the living area include a rented spare bedroom and attic space used as a home office. In contrast, business or rental spaces not within the living area affect your gain/loss calculations. Examples of space not within the living area include a first-floor storefront with an attached residence; a rented apartment in a duplex; or a working farm with a farmhouse on the property.
  1. You do not need to register with Sunnyvale.
  2. You will have to take into account now you can only deduct 4/5s of your mortgage interest and property interest from your personal side, and the other 1/5th now goes on your Sched E. So technically it’s a wash, or could be worse depending on your income. Now if your mortgage is 900k, then this would be a positive since you can only take 750k on personal.
  3. Yes. It is still your primary.

@BAJacket thanks for reply. My current mortgage is 1.5m roughly, since i can deduct only 750k if i am living by myself, so if i rent out the room then i can deduct more then 750k say if i rent out one room out of five then i can deduct (1500-750)/5 additional 150k in mortgage interest and same applies to property tax. I can deduct additional 20k-10k/5=2k. Please let me know your input.

For question 3 i was really confused since i was founding different answers online. Thanks a lot for clearifying

Yes this is correct, but realize this isn’t deducting off your income. It is deducting off your rental income Schedule E. So for example, let’s say you rental income is like 15k a year. Your mortgage deduction is 150k. You have now incurred a 135k passive loss which is not applicable to your w2 income assuming you are over the income limits (which most of us are in the bay area). This would be carried over each year until you either sell the property or have other passive income that offsets it.

Just to add, here is an article. If your income was less than 150k AGI, then you can deduct some amount up to 25k. There are thresholds as indicated in this article.

Thanks for reply but now i am confused :smile: . Me and my wife make roughly 350k every year. Assuming i rent a room at 1500$ per month. I will have rental income of 18k every year. so total income becomes 350+18=368k and i had pay tax on it but i can deduct interset on additonal 150k(~5k) and 10k+2k in property taxes , so extra which i can deduct is 17k, so it covers most of the tax which i will be paying on my rental income. I am not bringing up depreciation which i can claim at this point since at the point of sale i had to repay depreciation which i took over the years. Do i need to repay part of rental income as well ?. If you can pick one example and explain it will be great.

You are on the right track. I realize I probably confused you when I said 135k passive loss ( what I meant was the interest on the 135k). So in your example, if you have 18k rental income, and your interest on 150k of your mortgage is around 5k, and your property tax is say 20k total (divide by 5 and get 4k). Your PITI expense is totalling around 5k+4k = 9k. You then can do depreciation on the structure which usually for a SFH is 20% of your purchase price, if condo around 50% divided by 27.5. So if your purchase price was 2M, generally you would deduct 400k/27.5 and then divide by 5 in your case. Usually this will net out to a paper loss. If you are still net positive you will need to pay taxes on the excess income. If you are negative on paper, then you will carry over this loss until there is a passive gain to offset it in the future since your income is over 150k.