House hacking taxes: how to split a home that's part rental

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: House hacking makes one property two tax assets: your home and a rental. Split shared costs by a reasonable method, usually square footage or units. Deduct the rental share on Schedule E, depreciate only the rented portion over 27.5 years, and expect the rented unit's gain and all depreciation to be taxed when you sell.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

House hacking means buying a duplex, triplex or fourplex, living in one unit and renting the rest, or renting rooms in a single-family home. The tenants help pay the mortgage. The IRS, as usual, helps pay for the roof (eventually, over 27.5 years). But only the rented share. The tax work is mostly allocation: deciding which dollars belong to your home and which belong to the rental, then keeping that split consistent from purchase to sale.

CPA Warning Label: Split every shared expense by a documented, reasonable method. Over-allocating to the rental side is a common audit adjustment, and a rental unit's gain isn't covered by the home sale exclusion.

Allocating expenses personal vs rental

Pub. 527 says that when you rent part of a property, you divide expenses between the rental part and the personal part. There are three kinds of expenses:

• Rental-only expenses are 100% deductible on Schedule E. Examples: painting the tenant's unit, repairing the tenant's water heater, a rental listing fee, landlord insurance riders, or a separate meter for their unit.
• Personal-only expenses are not deductible. Examples: remodeling your own kitchen, or your unit's utilities.
• Shared expenses are split. Examples: mortgage interest, property tax, the main insurance policy, roof repairs, landscaping, a shared water bill.

Any reasonable method works. For a duplex with similar units, splitting by the number of units is common. If the units are different sizes, use square footage. Rooms rented in a house are usually split by the share of square footage the tenant uses exclusively, sometimes plus a share of common areas. Pick a method, document it, and use it every year.

The personal share of mortgage interest and property tax may still be deductible on Schedule A if you itemize, subject to the mortgage interest limits and the SALT cap. The rental share goes on Schedule E without those limits. That is one quiet advantage of house hacking: part of your interest and property tax becomes a business deduction even if you take the standard deduction.

Depreciation on the rented part

You depreciate only the rental portion of the building. Start with your cost basis (purchase price plus certain closing costs), subtract land, then multiply by the rental percentage. The rental share is residential rental property, recovered over 27.5 years straight line using the mid-month convention, per Pub. 946.

Improvements follow the same logic. A new roof on a fourplex where you live in one unit is 75% rental and depreciable, and 25% personal and added to your home's basis. A new kitchen in a tenant's unit is 100% rental. Appliances and furniture you provide only to tenants are 5-year property, and may qualify for bonus depreciation, which is 100% for property acquired after January 19, 2025, as of Oct 2026 (IRS IR-2026-06 and Notice 2026-11). See the depreciation guide.

Depreciation is allowed or allowable. If you skip it, your basis still drops, and you'll pay recapture on depreciation you never deducted. Claim it.

Section 121 on sale

When you sell, the home portion can qualify for the section 121 exclusion (up to $250,000 single or $500,000 joint) if you owned it and lived there at least 2 of the last 5 years. The rental portion is the hard part:

• Separate dwelling units, such as the other side of a duplex, are not part of your residence. Under Treas. Reg. 1.121-1(e), you must allocate basis and amount realized between your unit and the rental units, and the rental units' gain is taxable. The rental units may be eligible for a 1031 exchange instead.
• Rooms or space within your dwelling unit are treated differently. The regulation does not require you to split the gain. The whole gain may qualify, except depreciation after May 6, 1997, which is taxed as unrecaptured section 1250 gain at up to 25%.

Either way, depreciation is always taxed. See depreciation recapture and the home sale exclusion.

Room rental vs unit

The room-or-unit distinction drives a lot:

Passive activity rules apply in both cases. If your adjusted gross income is under $100,000 and you actively participate, you can deduct up to $25,000 of rental losses against other income, phasing out by $150,000 (section 469(i)). Above that, losses carry forward. See passive activity loss rules.

Example

Illustration (made-up numbers): Frugal Fran buys a duplex with two identical units for $500,000; $100,000 of that is land. She lives in unit A and rents unit B for $2,000 a month. Her first full year:

Rental income is $24,000. Rental expenses total $25,173, so Schedule E shows a loss of $1,173. With her income under $100,000, she can deduct it. Her personal $11,000 of interest and $4,000 of property tax go on Schedule A only if itemizing beats the standard deduction, and they probably won't.

Lavish Larry, in the same building, deducts 100% of the roof repair on Schedule E "because the tenant complained about the leak." The roof covers his unit too. Half belongs to him personally, and that half isn't deductible. An audit fixes this quickly, with interest.

Five years later, Fran sells for $700,000. Unit B's half of the gain is taxable, including about $36,000 of depreciation taxed at up to 25%. Unit A's half qualifies for the 121 exclusion. If she wants to defer unit B's gain, a 1031 exchange of the rental portion is possible. See combining 1031 and 121.

Common house hacking traps

• Renting to family below market. If a relative pays less than fair rent, the unit counts as personal use, and under section 280A, expenses are limited to rental income. You can't create a loss. Charge fair rent and document comparable rents.
• Deducting your own unit's utilities. If you pay all the utilities and the tenant reimburses part, the tenant's share is rental income and the matching utilities are a rental expense. Your own share stays personal.
• Forgetting the land split. Land never depreciates. Use the county assessor's land-to-building ratio or an appraisal, and apply it before taking the rental percentage.
• Changing the allocation every year. A method that keeps changing in the rental's favor looks like a method chosen for the result. Keep it consistent unless the facts change, for example if you take over a second unit.
• Ignoring FHA or loan occupancy rules. These aren't tax rules, but house hacking with an owner-occupant loan usually requires you to live there for a set period. Moving out early can be a lender problem.
• Skipping the 1099 check. If you pay contractors $2,000 or more for rental work in 2026, Form 1099-NEC may be required, since the One Big Beautiful Bill Act raised the threshold from $600 starting with 2026 payments, as of Oct 2026. Confirm the current rule in the Form 1099 instructions.

Records that make it work

• A floor plan or appraisal with square footage, showing how you calculated the split.
• Separate leases and a log of rent received.
• Receipts sorted into rental-only, personal-only and shared.
• A depreciation schedule for the building and each improvement, with the rental share.
• A move-in date and proof of residence for the 121 test.

When you move out and rent your old unit too, the property becomes fully rental. Your unit's depreciable basis is the lower of its adjusted basis or its fair market value on conversion. See converting your home to a rental.