House Hacking Tax Benefits You Should Know

When you rent out part of the home you live in, the IRS treats the property as two pieces: a rental part and a personal part. You report the rent and deduct the rental share of shared costs, such as mortgage interest, property taxes, insurance, and utilities, on Schedule E, along with depreciation on the rented part of the building. If that produces a loss on paper, you can deduct up to $25,000 of it against your wages when your modified adjusted gross income (MAGI) is $100,000 or less, with the allowance shrinking to zero at $150,000. A rented room inside your own living space follows a stricter rule that generally blocks a loss.

For the strategy itself, including the duplex and room setups used in the examples here, see the house hacking guide.

How do you split expenses between the rented and personal parts?

IRS Publication 527 says to divide shared expenses "as though you actually had two separate pieces of property," using any reasonable method. The two common methods are the number of rooms and the square footage.

• Duplex or multi-unit: Units of equal size split 50/50. In a triplex where you live in one of three equal units, two-thirds is rental.
• Rooms in your home: Divide the square footage the tenant uses by the home's total. A 300-square-foot bedroom in a 2,000-square-foot house is 15% rental. Some costs, such as water, can be split by the number of people using them.

Costs that belong only to the rental part are 100% deductible, such as painting the tenant's unit, repairs inside it, or advertising for a tenant. Costs that belong only to your part are not deductible as rental expenses.

The personal share of mortgage interest and property taxes is deductible only if you itemize on Schedule A, where the 2026 limit on state and local taxes is $40,400 for most filers. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly. In the duplex example below, the personal half is $14,000 of interest and $2,500 of taxes, so a single filer who itemizes gains little over the standard deduction and a married couple with few other deductions gains nothing. The rental share is deductible on Schedule E whether or not you itemize.

Mortgage principal is not deductible for either part. Security deposits you plan to return are not income, but rent paid in advance is income in the year you receive it.

How does depreciation work on the rented part?

Depreciation is a yearly deduction for the wear on the building. You can depreciate only the rented part, and never the land.

1. Start with your cost basis: the purchase price plus certain closing costs, such as title fees and transfer taxes, that Publication 527 lists as part of basis. If you start renting space you had been living in, use the lower of your adjusted basis or the fair market value on the date the rental starts.
2. Remove the land. If the contract doesn't split the price, Publication 527 allows you to use the ratio of land to building on the property tax assessment.
3. Multiply by the rental percentage.
4. Divide by 27.5 years, the recovery period for residential rental buildings. A building qualifies when at least 80% of its rent comes from dwelling units, and the fair rental value of your own unit counts toward that test.

Example: a duplex bought for $420,000 where the tax assessment puts 20% of the value in the land.

• Building: $420,000 x 80% = $336,000
• Rental half: $168,000
• Full-year depreciation: $168,000 / 27.5 = $6,109

The first year is prorated by month. If the unit is ready to rent in August, the IRS table rate is 1.364%, so the first-year deduction is $2,292. Report depreciation on Form 4562 in the first year. Appliances, carpeting, and furniture you buy only for the rental part are 5-year property, and a new roof is depreciated over 27.5 years, with only the rental share deductible for shared items. Depreciation on rental property walks through basis adjustments and the full IRS tables.

Example: a duplex on Schedule E

The same duplex in a full year, with the other unit rented for $1,950 a month:

Before depreciation, the rental half shows a $3,800 profit. Depreciation turns it into a $2,309 tax loss.

Can a rental loss reduce your other taxes?

Rental activity is passive under the tax code, so losses generally offset only passive income. The exception that matters for most house hackers is the $25,000 special allowance for rental real estate you actively participate in. You qualify if you own at least 10% of the property and make management decisions, such as approving tenants, setting rent, and approving repairs.

If you are married filing separately, the allowance is $12,500 with a $50,000 to $75,000 phase-out, and only if you lived apart from your spouse all year; otherwise there is no allowance. A loss you can't use carries forward and offsets rental income in later years, and any remaining loss is generally allowed when you sell the whole property. Form 8582 figures the limit. Passive loss rules explains MAGI and the real estate professional exception.

Rooms inside your home work differently. When you rent part of a dwelling unit you also live in, section 280A of the tax code caps the deductions for the rented part at the rent it brings in. Expenses above that carry forward to the next year. In practice, a room rental can bring your taxable rent down to zero but generally can't create a loss that offsets your wages. A duplex unit you don't live in is a separate dwelling unit, so this cap doesn't apply to it.

Renting to a family member at less than a fair rental price counts as personal use, which limits deductions further, so charge market rent if you rent to relatives.

What happens to the rental part when you sell?

The rental part affects the home sale exclusion, which lets you exclude up to $250,000 of gain ($500,000 for most married couples filing jointly) on a home you owned and lived in for 2 of the last 5 years, as long as you haven't used the exclusion on another home sale in the prior 2 years. Publication 523 sets two rules for the rented part:

• Rented space within your home, such as a room: you don't split the gain between the two parts.
• A separate unit, such as the other half of a duplex: gain on that part is excluded only if you also lived in it for 2 of the last 5 years. Otherwise you split the gain between the two parts, and the rental part's gain is taxable. Rental years after 2008 before you moved into that unit can still make part of its gain taxable.

In both cases, the depreciation you claimed, or could have claimed, after May 6, 1997, can't be excluded and is taxed when you sell.

House hacking exit strategies covers selling, keeping the property as a rental, and the timing that affects the exclusion.