Renting Out a Room or ADU: Rules, Taxes, and Lease Basics

Renting part of the place where you live is a popular way to start. You might rent a spare bedroom to a roommate or build or convert an accessory dwelling unit (ADU), such as a basement apartment, garage conversion, or backyard cottage. The setups look similar but the rules are not the same. This guide covers the main issues: zoning, legal status, fair housing, taxes, insurance, and the lease.

Room in your home vs an ADU

Renting a room means you share living space such as the kitchen or bath with the person renting. An ADU is a separate living unit on the same property, often with its own entrance, kitchen, and bath. In some places an ADU is a legal, permitted unit. In others, an unpermitted in-law unit may be illegal to rent even if it has been used that way for years.

Zoning and permits

Rules for ADUs and room rentals are set mostly by cities and counties and vary a lot. Common issues include:

• Whether ADUs are allowed in your zone at all
• Permit and inspection requirements, including building, electrical, and plumbing codes
• Parking, size, and setback limits
• Owner-occupancy requirements, which in some places mean you must live on the property
• Limits on how many unrelated people can live in one home
• Rental registration or licensing

Check with your local planning or building department before you rent, and before you build or convert anything. Renting an unpermitted unit can expose you to fines, problems with insurance claims, and trouble when you sell. Do not rely on what a neighbor told you.

Also check any HOA or condo rules, and your mortgage terms, which may have occupancy provisions. Ask your lender if you are unsure.

Roommate or tenant?

Your legal status matters because it affects notice periods, deposit rules, and how you end the arrangement. Depending on your state, someone who pays you rent to live in your home may be a tenant with legal protections, even if they share your kitchen. Some states have separate rules for lodgers or boarders in an owner-occupied home, and the rules vary by state and sometimes by city. Do not assume that “roommate” means you can remove someone with a day’s notice. Check your state’s landlord-tenant statute, or ask a local attorney, before you rely on any shortcut.

Two other setups to understand:

• Roommates who sign a lease with you are co-tenants. Our guide on roommates and co-signers explains joint responsibility.
• A roommate who rents only from you has an agreement with you alone.

In either case, put it in writing.

Fair housing: the exceptions are narrow

Federal fair housing law has exemptions that some owners rely on, but they are limited and easy to get wrong. Under 42 U.S.C. 3603(b), the law exempts rooms or units in dwellings with living quarters for no more than four families living independently, if the owner actually maintains and occupies one of the living quarters as a residence. It also exempts certain single-family houses sold or rented by a private individual owner, with conditions: the owner may not own more than three such houses at one time, and the sale or rental must be done without a real estate broker, agent, or salesman (or anyone in the business of selling or renting dwellings), and without a discriminatory advertisement. You can read the text at Cornell’s Legal Information Institute.

Important limits:

• The exemption text carves out section 3604(c), so the advertising rule still applies. Under 42 U.S.C. 3604(c), it is unlawful to make, print, or publish any notice, statement, or advertisement for a rental that indicates a preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin. So even an exempt owner cannot run an ad that says “no kids” or “Christians only.”
• State and local fair housing laws may be stricter and may not have the same exemptions.
• Separately, a Civil Rights Act of 1866 provision, 42 U.S.C. 1982, bars race discrimination in property transactions and does not contain these Fair Housing Act exemptions.
• The exemption depends on the facts, such as how many units, who lives there, and how you market the rental. For the single-family house exemption, the statute expressly requires renting without a broker, agent, or anyone in the business of renting, so using a property manager or leasing agent can cost you that exemption.

Because of this, the safest approach is to follow fair housing rules anyway. Our fair housing guide explains them in plain English, and the rental listing guide shows safe wording. A legitimate, consistent preference such as no smoking or a cap on occupants is different from discrimination, but check local rules before you finalize your criteria.

Taxes

Rental income from a room or ADU is generally taxable, and you can usually deduct related expenses, but the rules for renting part of a home need care. IRS Publication 527 includes a section on renting part of your property, which covers how to divide expenses between personal and rental use (Publication 527). It says you can use any reasonable method, and that the most common are the number of rooms or the square footage. Publication 527 also says that if you rent a property that you also use as your home for fewer than 15 days in the year, you do not include the rent in income, and the expenses are not rental expenses. That rule applies to very short rentals, not to a room you rent out all year.

Practical points:

• Keep records of rent received and expenses from the start. See rental record keeping.
• Shared costs like utilities and mortgage interest usually have to be divided in a reasonable way. Expenses only for the rented part, such as painting the tenant’s room, are generally fully rental expenses. Ask a CPA how to apply this to your home.
• Depreciation can apply to the rented portion. See rental property depreciation explained. It can also affect your taxes when you sell your home, so get advice before you start.
• Review landlord tax deductions.

Insurance

Tell your insurer before you rent. A standard homeowner policy may exclude or limit coverage when you rent a room or unit, and a tenant’s belongings are not covered by your policy. Ask about adding rental coverage or switching to a landlord policy, and ask whether liability coverage extends to a tenant’s guests. For an ADU, you may need a separate policy. See landlord insurance explained. Consider requiring the tenant to carry renters insurance if your state and lease allow it.

Lease basics

Use a written lease or rental agreement, even for a friend. Cover:

• Rent amount, due date, and late-fee terms that comply with local law
• Security deposit amount and how it is handled
• Shared space rules, quiet hours, guests, and parking
• Which utilities the tenant pays and how shared bills are split
• Entry rules. See landlord entry rules and notice.
• How either side ends the tenancy

See lease clauses every landlord needs for a fuller list.

Action step

Call your city or county planning department and ask: Is my room rental or ADU allowed? What permits or registration do I need? Then call your insurer and lender. Write down the answers before you advertise.

Related guides

• Fair housing for landlords
• Roommates and co-signers
• Landlord insurance explained
• Lease clauses every landlord needs
• How to become a landlord