House hacking is a popular investing strategy where you rent out part of your personal residence. The tax treatment of house hacking revenue and expenses is the same as renting out an entire property, with the caveat that you cannot claim expenses related to your personal use of the property.
For a thorough discussion, please check out our resource article on accounting for house hacks.
Some important things to know:
Expenses that apply just to your personal residence are not tax deductible.
Expenses that apply to only the rental unit(s) are tax deductible.
Expenses that apply to the personal residence and the rental unit(s) must be prorated or split between the personal and rental units, with only the rental portion being tax deductible.
For example, if you own a duplex with two equal-sized units and live in one while renting out the other, the expenses shared between personal and rental are deductible at 50%. So, of a $200 landscaping expense—which applies to both units—$100 would be tax deductible.
Best practices for keeping the books for a house hack
1) Set up the house hack as a multi-unit property
The best practice for a house hack is to treat it as a multi-unit property, with one unit representing your personal residence and each rentable space as its own unit. This provides you with three places to book transactions:
your unit, which will not be deductible
the rental unit(s), which will be deductible
the property level, which will be prorated across the personal and rental unit(s)
This structure closely reflects real life and provides a place to book every transaction.
To book transactions to the property level, select 'All Units' from the unit selector dropdown after selecting the property. These transactions will be reported in the 'None Assigned' column on the Net Income by Unit report.
2) Book transactions at full value throughout the year and prorate at tax time
Additionally, the other generally recommended best practice is to book all transactions at their full value during the year and then prorate once at tax time. This refers to expenses that apply to your personal and rental unit(s). Only the rental portion of those expenses will be deductible from your taxes, but those transactions are imported from your bank at full value.
Therefore, your options are to book those transactions at their full value and prorate once at tax time or split each transaction into the personal and rental pieces as they occur and only recognize the rental piece as an expense.
The main benefit of only doing the proration at tax time is saving time on an ongoing basis. Splitting transactions takes time and can't be easily automated. The main drawback of this path is that your expenses will be overstated until you do the proration, so it can be harder to assess rental performance.
If preferred, you could choose to split transactions as they come in instead of waiting until the end of the year. This will take a little more time, but will provide you with more accurate financials throughout the year.
If you split transactions as they come in, the personal portion of the expenditure can be booked as an Owner Distribution, which does not impact your taxable net income.
3) Use the Net Income by Unit report
The Net Income by Unit report provides the best lens to evaluate your house hack. This report provides a property totals column, a column per unit, and a 'None (no unit) Assigned' column. The 'None Assigned' column reports transactions booked to the property level—where you select 'All Units' instead of a specific unit.
At tax time, the transactions assigned to your personal unit would not be deductible, the transactions assigned to the rental unit(s) would be deductible, and the totals in the 'None Assigned' column would be prorated across the personal and rental units.
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