House hacking tax optimization

[Zeni Kharel]

Hello, 

I would appreciate the team's input in this situation.

Brothers A and B live in a 5 bedroom home. They have lived there for over 2 years. Out of the 5 bedrooms, they have rented out 2 bedrooms.Brother A is moving to a different state soon and his bedroom will soon be rented out.

How can this living situation be best tax optimized?

[Ricardo R.]

Hey Zeni,

We’ve seen this setup a lot with house hacks, and the tax treatment depends on how much of the property is personal use vs. rental use. Since A and B have lived there for 2+ years, here’s how I’d break it down:

1. Current Setup (Owner-Occupied + Rooms Rented)

• The house is their primary residence → they keep the Section 121 exclusion if they sell (up to $250K each, $500K if married) as long as they’ve lived there 2 of the last 5 years.

• The rented bedrooms = rental portion → they can deduct:

  • A share of mortgage interest & property taxes

  • A share of utilities, insurance, repairs

  • Depreciation on the rented portion of the home

The share is usually based on square footage (e.g., if 2 of 5 bedrooms = 40%, then 40% of those expenses are rental deductions).

2. When Brother A Moves Out

• His room becomes a third rental unit → now an even bigger share of expenses can be deducted.

• Brother B still lives there, so the property is still partially personal, partially rental.

3. Key Tax Optimizations

• Depreciation: Only applies to the rented portion, so the more rooms rented, the bigger the depreciation deduction.

• Section 121 Exclusion: Selling in the future? Only the owner-occupied portion stays tax-free if they meet the 2-year rule; the rental portion may have depreciation recapture when sold.

• Separate Records: Track rental income + expenses carefully → keep personal and rental costs split by % of space rented.

4. Example

• 5 bedrooms, 3 rented → 60% rental use.

• If annual expenses = $20K (mortgage interest, taxes, utilities, etc.) → $12K could be deducted against rental income.

If it were me:

1. Track rental % of the house by square footage.

2. Deduct that portion of expenses + depreciation each year.

3. Keep the 2-year rule in mind for when/if they sell later.

4. @Zeni Kharel I hope this helps you out and somewhat organizes it, I sent you DM on BP and hope you area able to assist.