Renting out a room in your house: a guide for live-in landlords

Renting out a spare room is one of the easiest ways to start earning rental income: no second property, no big repairs, and someone to share the house costs. It is also different from renting out a whole home, because you live with the person paying you. That changes the agreement you need, how house rules work, how taxes are figured, and sometimes which laws apply. Here is what to sort out before you hand over a key.

Before you list the room

• Call your insurance agent. Tell them you plan to rent a room. Some homeowners policies limit coverage when a paying boarder lives in the home, and you may need an endorsement or a different policy. Your policy will not cover the renter's belongings, so ask them to get renters insurance.
• Check your mortgage and HOA. Renting a room in a home you live in is usually fine with a lender, but read your mortgage terms. If you have an HOA or condo association, check its rules on renters.
• Check local rules. Some cities have rental registration, occupancy limits or rules about renting rooms. A quick call or a look at your city's website saves trouble later.
• Decide what is included. Utilities, internet, parking, laundry, kitchen use, a bathroom of their own or shared. Renters compare these carefully, and they are the source of most housemate disputes.

Lodger, roommate or tenant?

When you rent a room in the home you live in, the renter is often called a lodger or boarder. Many states treat that arrangement like any other tenancy, but some have special rules for a lodger in an owner-occupied home, including how the arrangement can be ended. California, for example, has a specific rule for an owner who rents to a single lodger. The rules can change if you have more than one lodger, so look up your state's rules before you sign anything, especially the rules for ending the arrangement.

Write a room rental agreement

A handshake is the most common way room rentals start and the most common reason they go badly. A written room rental agreement should cover:

• The room, and which shared areas the renter can use
• Rent, the due date, how to pay, and any late fee your state allows
• Security deposit amount and how it will be returned (see security deposit laws by state)
• What is included: utilities, internet, parking, furniture
• House rules: guests and overnight stays, quiet hours, cleaning, shared food, smoking, pets
• Length of the agreement (month to month or a fixed term) and how much notice either side must give to end it

House rules work best when they are specific. "Overnight guests no more than two nights a week" is enforceable; "be respectful" is not.

Choosing who to rent to

Use the same written criteria for every applicant: income, references, and a background or credit check if you use one. The federal Fair Housing Act has a narrow exemption for some owner-occupied buildings with four or fewer units, but the ban on discriminatory advertising still applies, and many states and cities have stricter rules. Write your listing around the room and the house rules, not the kind of person you want.

How taxes work when you rent part of your home

Rent from a room is rental income, reported on Schedule E. Because you live in the rest of the house, the IRS says you must divide expenses between the rented part and your personal part. Expenses for the rented room only (painting it, furniture for it) can be deducted as rental expenses. Shared expenses such as utilities, insurance, mortgage interest and repairs to the whole house are split, often by the share of the home's square footage or number of rooms the renter uses. IRS Publication 527 covers this in detail, and a tax professional can confirm the right method for you.

Keep rent payments and room expenses clearly recorded from the first month, so the split is easy at tax time.

Keep rent separate from friendship

Living with your renter makes money conversations awkward. Asking for rent across the kitchen counter is uncomfortable for both of you, and cash handed over in passing is easy to forget. Two habits help:

• Make rent automatic and impersonal. An emailed invoice, an online payment and a receipt mean you never have to bring it up.
• Keep everything in writing. Repairs, changes to house rules and any agreement about late rent go in a text or email, not just a conversation.

Renting more than one room? Bill each renter separately rather than splitting one total; our guide to renting by the room explains why.

How RentMerchant fits

RentMerchant handles the money side so you do not have to. Add your home as a property and the room as a unit, invite your renter by email, and set up monthly rent once. Each month's invoice goes out on its own, your renter pays by bank transfer or card, and both of you get a record. Overdue reminders and late fees can run automatically on the terms you set, so you are never the one asking. You can also e-sign the agreement and log room expenses for tax time.

The Free plan covers up to three properties with unlimited units. Create a free landlord account, or read the first-time landlord checklist if this is your first renter.

This article is general information, not legal or tax advice.