Do I report Rent a Room Scheme income on my US tax return?

Yes. The UK Rent a Room Scheme exempts up to £7,500 of gross receipts from UK tax, but the US has no equivalent exemption. A US citizen living in the UK reports the lodger rent on their US return, usually on Schedule E, translated into dollars. Allocated household expenses and depreciation on the let room reduce the taxable amount, but the income itself must be reported.

Is lodger income reported on Schedule E or Schedule C?

Usually Schedule E. IRS Publication 527 moves a rental to Schedule C only when you provide substantial services primarily for the tenant's convenience, such as regular cleaning, changing linen or maid service. Furnishing heat and light or cleaning shared areas does not count. Schedule C income can attract self-employment tax, so the level of service matters.

What depreciation period applies to a room let in my London home?

Residential rental property used predominantly outside the United States must use the Alternative Depreciation System. IRS Publication 946 gives a 30-year straight-line recovery period for residential rental property placed in service after 2017, and 40 years for earlier property. Only the rental percentage of the building basis is depreciated, and land is excluded.

Can I claim a foreign tax credit on tax-free Rent a Room income?

Not directly, because no UK tax was paid on that income. However, rents fall in the passive category on Form 1116, so excess UK tax paid on other passive income, such as UK-taxed dividends or interest, may absorb the US tax on the rent. If you pay UK tax under Method B, that UK tax can be credited, subject to the limitation.

Does letting a room affect the US exclusion when I sell my UK home?

A rented spare bedroom is space within the living area, so IRS Publication 523 does not require you to split the gain. But gain equal to depreciation allowed or allowable after 6 May 1997 cannot be excluded under section 121 and is recaptured, even if you never claimed the depreciation. Claiming it annually at least secures the deductions.

What if I never reported lodger income on past US returns?

If the omission was non-willful and you live in the UK, the Streamlined Foreign Offshore Procedures are usually the route. You file three years of delinquent or amended returns and six years of FBARs, pay tax and interest, and certify non-willful conduct. Eligible taxpayers are not charged failure-to-file, accuracy-related or FBAR penalties under the procedures.

US Tax Return Preparation for Expats: Rent-a-Room Income

US tax return preparation for expats who let a furnished room in their UK home starts with one uncomfortable fact: the UK Rent a Room Scheme can make lodger income tax-free for HMRC, but the IRS has no equivalent exemption, so the receipts still belong on your US return. For a US citizen in London, that usually means Schedule E, a split of household expenses between the let room and the rest of the home, mandatory 30-year depreciation on the room, and no foreign tax credit for income on which the UK charged nothing. Handled properly, the US tax on a single lodger is often modest. Handled badly, or not at all, it creates an unreported-income problem and a depreciation trap that surfaces years later when the house is sold.

This guide is written from the preparation side of the desk. It walks through how the UK scheme works, how the same receipts are reported to the IRS, how we allocate costs and depreciation, where the credit mismatch bites, what happens when you eventually sell the home, and how to fix earlier years that were missed.

What is the UK Rent a Room Scheme?

The Rent a Room Scheme is a UK income tax relief that lets a resident landlord receive gross receipts from letting furnished accommodation in their only or main home up to an annual threshold without paying UK tax. GOV.UK sets the threshold at £7,500 per year, halved to £3,750 if you share the income with someone else, such as a joint owner (https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme). The exemption is automatic below the threshold, so there is nothing to file with HMRC; above it, you must complete a Self Assessment return.

HMRC helpsheet HS223 fills in the detail that matters for a cross-border return (https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet/hs223-rent-a-room-scheme-2026). Gross receipts are not just the rent. They include amounts received for meals, goods and services such as cleaning or laundry, and any balancing charges. The limit is the same even if you let for less than 12 months, and receipts are counted by UK tax year, which runs from 6 April to 5 April.

You can use the scheme if you let a furnished room to a lodger in your only or main home, including where the letting amounts to a trade such as a bed and breakfast.
You cannot use it if the accommodation is not part of your main home when you let it, is unfurnished, or is used as an office or for any business.
You cannot use it for a UK home that is let while you live abroad, which matters for Americans who later leave London but keep the property.
If receipts exceed the limit, you choose between Method A (tax on actual profit) and Method B (tax on gross receipts minus £7,500 or £3,750, with no expenses or capital allowances).
HMRC applies Method A automatically; electing into Method B, or opting out of the scheme when receipts are below the limit, must be done within one year of 31 January following the end of the tax year.

Why US tax return preparation for expats still captures tax-free lodger income

A US citizen is taxed on worldwide income regardless of residence, and the IRS confirms that citizens abroad must file if their gross income from worldwide sources reaches the filing threshold for their status (https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad-filing-requirements). A UK statutory exemption changes what HMRC taxes. It does not change what counts as gross income under the Internal Revenue Code, and the saving clause in the US-UK income tax treaty generally preserves the US right to tax its own citizens as if the treaty did not exist. In the returns we prepare, the practical rule is simple: every pound of lodger rent received in the calendar year is translated into dollars and reported.

Two other expat reliefs do not help either. The foreign earned income exclusion applies only to income received for performing personal services, as IRS Publication 54 explains (https://www.irs.gov/publications/p54), and ordinary rent is not earned income. The foreign tax credit, discussed below, needs UK tax to have actually been paid or accrued. Income that the UK exempts in full therefore arrives on the US return with no credit and no exclusion attached, which is the single most common surprise for new clients.

Schedule E or Schedule C: which does lodger income go on?

For most London homeowners with a lodger, the answer is Schedule E. IRS Publication 527 says Schedule C is generally used when you provide substantial services in conjunction with the property, and it gives regular cleaning, changing linen or maid service as examples of services primarily for the tenant's convenience (https://www.irs.gov/publications/p527). Substantial services do not include furnishing heat and light, cleaning of public areas or trash collection.

The distinction has consequences beyond which schedule is used. Schedule C income can attract US self-employment tax, and the US-UK Totalization Agreement then becomes relevant to which country's social security system covers it. Rent from an active business can also fall outside the passive category for foreign tax credit purposes. A lodger who gets a furnished room, shared kitchen and utilities is a Schedule E case. A host running what is in substance a small bed and breakfast, with meals, daily cleaning and fresh linen, needs a closer look. Notice that HMRC's gross receipts definition includes payments for meals and laundry; on the US side, those same services are the facts that can push the activity onto Schedule C.

How do you split expenses when you rent one room in your home?

Publication 527 treats renting part of your property as though you owned two separate pieces of property: the rented part and the personal part. Expenses that relate only to the rented room, such as painting it or liability insurance taken out because you have a lodger, are fully deductible. Expenses for the whole house, such as mortgage interest, heating or insurance, must be divided. The IRS accepts any reasonable method and names the two most common: the number of rooms in the home and the square footage. Some costs, such as water, can reasonably be split by the number of people using them. You cannot deduct any part of the first phone line, but a second line installed solely for the tenant is fully deductible.

Direct costs of the let room: redecoration, furniture bought for the lodger, a lock, a second broadband line used only by the lodger.
Shared costs to allocate: mortgage interest on the home, council tax, buildings and contents insurance, heating, electricity, water, general repairs to the house.
Depreciation on the rented portion of the building and on furniture and equipment used for the rental.
Costs you cannot allocate to the rental: the purely personal share of shared costs, and capital improvements to parts of the home the lodger never uses.

The failure mode we see most often is a return that reports the rent but claims no allocation at all, because the client assumed that tax-free in the UK meant expense-free on the US side. The opposite error also appears: allocating a share of every household cost, including items with no connection to the lodger. Document the method (floor area measurements or a room count) and apply it consistently every year.

What depreciation period applies to a room let in a UK home?

A room in a London house is residential rental property used outside the United States, which takes it out of the familiar 27.5-year schedule. IRS Publication 946 lists tangible property used predominantly outside the United States among the assets that must use the Alternative Depreciation System, and gives the ADS recovery period for residential rental property as 30 years, or 40 years for property placed in service before 1 January 2018 (https://www.irs.gov/publications/p946). ADS uses the straight-line method, and property that must use ADS cannot claim the special depreciation allowance.

The starting figure matters as much as the period. When you convert part of a personal home to rental use, Publication 527 sets the depreciable basis at the lesser of fair market value or your adjusted basis on the date of conversion. Land is never depreciated, so the building element has to be separated from the land. For a London home bought years ago, adjusted basis is often the lower figure; for a recent purchase in a falling market, fair market value may be. Only the rental percentage of that building basis, calculated with the same room or floor-area method used for expenses, goes on the depreciation schedule.

Personal use days and the 15-day rule for event lets

Section 280A, explained in chapter 5 of Publication 527, governs a dwelling unit that is used both personally and as a rental. You use a unit as a home if your personal use exceeds the greater of 14 days or 10% of the days it is rented at a fair rental price. Publication 527's own example is a guest bedroom rented out on university event weekends and used rent-free by a relative, which it treats as used as a home. That structure is directly relevant to owners who let a spare room during Wimbledon fortnight, a major concert run or a sporting final.

Here is the useful part. If you use a dwelling unit as a home and rent it for less than 15 days during the year, Publication 527 says the rental income and expenses are not reported, and home expenses are claimed only as normally allowed on Schedule A. A spare room let for 12 nights during an event, and otherwise used by the family, can therefore fall outside US reporting even though the receipts are real. Once the room is let for 15 days or more, all of the rental income is reportable and expenses must be divided between rental and personal use, with deductions for a unit used as a home limited to rental income and any excess carried forward. A full-time lodger in the same room will exceed 15 days on its own, so the exception does not help an owner who has both.

No UK tax paid means no foreign tax credit

The foreign tax credit exists to prevent double taxation. When the Rent a Room Scheme exempts the income, there is no UK tax to credit, and the US tax on the net rental profit is a real cost. This is the gap no competitor guide addresses squarely, and it is why US tax return preparation for expats with a lodger cannot simply assume that the US bill will be wiped out.

There is a partial offset that high-net-worth clients often have available. The Form 1116 instructions place rents in the passive category, alongside dividends and interest (https://www.irs.gov/instructions/i1116). The credit limitation is computed per category, so UK tax paid on other passive category income, for example dividends or interest taxed in the UK at rates above the effective US rate, can create excess credit within the same category that absorbs US tax on the untaxed rent. Unused foreign tax can also be carried back one year and forward ten years. Whether this helps depends entirely on the rest of the client's passive income, so it has to be modelled rather than assumed.

How Method B changes the credit picture

Once receipts exceed £7,500, the UK choice between Method A and Method B also changes the US outcome. Under Method B, HMRC taxes gross receipts minus the £7,500 allowance with no expense deductions. On the US return, you are taxed on gross receipts minus allocated expenses and depreciation. The two tax bases rarely match, so the UK tax that becomes creditable is not a neat proportion of the US tax on the same income. Add the timing difference between the UK tax year ending 5 April and the US calendar year, and the credit claimed for a given year has to be traced carefully to the UK liability that relates to income in that year.

In practice, Method B is often attractive for UK purposes where genuine expenses are low, and it generates some UK tax that can be credited in the US. Method A tends to produce a lower UK tax figure where expenses are high, which means less credit on the US side. The UK decision should be made with the US return in view, because a choice that saves UK tax can simply move the tax to the IRS.

Worked scenario: a London lodger on a US return

The following figures are an illustration only, not a client's actual return. Assume a single US citizen owns a London house outright, bought in 2015, and takes a lodger from 1 January 2025 at £600 a month, so calendar-year receipts are £7,200 and each UK tax year stays under the £7,500 threshold. The UK tax on this income is nil and nothing is filed with HMRC. The let room is 15% of the floor area, and no substantial services are provided.

Gross rent: £7,200.
Council tax share: £3,000 x 15% = £450.
Utilities share: £4,800 x 15% = £720.
Insurance share: £1,200 x 15% = £180.
Redecoration of the let room (direct cost): £900.
Depreciation: assumed building basis of £700,000 (the lower of fair market value and adjusted basis at conversion, excluding land) x 15% = £105,000, over 30 years under ADS with the mid-month convention for a January start, giving about £3,354 in the first year.
Total deductions: £5,604. Net rental profit: £1,596.

For translation we assume the IRS's published 2025 yearly average rate for the pound of 0.759, taken from the IRS yearly average currency exchange rates page (https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates). Dividing by that rate gives gross rent of about $9,486 and net profit of about $2,103 on Schedule E. The IRS says it has no official exchange rate and accepts any posted rate used consistently. For simplicity, this illustration translates every figure at the annual average; on a real return, the depreciable basis is translated using the rate appropriate to when the property was acquired and improved, not the current year's average.

Because no UK tax was paid, the $2,103 carries no foreign tax credit of its own. If the client has substantial UK-taxed dividends in the passive category, excess credit there may absorb the US tax. If not, the US tax is payable at the client's marginal rate. Now vary one fact: rent of £900 a month, or £10,800 a year. Under Method B the UK taxes £3,300 (£10,800 minus £7,500). At an assumed 40% UK marginal rate that is £1,320 of UK tax. The US return shows £5,196 of net profit (£10,800 minus the same £5,604), or about $6,846, so the UK tax now provides a credit against the US liability on that income, subject to the category limitation and the tax-year timing described above.

What happens when you later sell the home?

This is the second gap angle, and the one that costs most. IRS Publication 523 treats a rented spare bedroom as space within the living area (https://www.irs.gov/publications/p523). That is good news in one respect: you do not have to split the gain on sale between the home and the rental part, and you do not report the rental part separately on Form 4797. The section 121 exclusion of up to $250,000, or $500,000 for a married couple filing jointly, can still apply to the whole property if the ownership and use tests of two years out of the five before sale are met.

The catch is depreciation. Publication 523 says you cannot exclude the part of the gain equal to depreciation allowed or allowable for periods after 6 May 1997, and that amount must be recaptured. The word allowable is the trap. If you let a room for eight years and never claimed depreciation, the IRS still treats you as having had the deduction available. In our illustration, eight years at roughly £3,500 a year is close to £28,000 of allowable depreciation, which on sale becomes gain that section 121 cannot shelter, even though the owner never received the benefit of the deductions. Claiming the depreciation each year at least ensures the owner receives the deductions that will later be recaptured.

London sales also bring currency effects. Gain for US purposes is measured in dollars, with basis translated at historical rates and proceeds at the rate on the date of sale, so a home can show a US gain where the sterling result is flat. UK private residence relief is a separate calculation with its own rules on letting, and it does not change the US figure.

FBAR: the account, not the income, is the trigger

Lodger income does not create an FBAR obligation by itself. The FBAR is triggered by the accounts the rent is paid into. The IRS FBAR page states that a US person must file FinCEN Form 114 if the aggregate value of foreign financial accounts exceeded $10,000 at any time during the calendar year, with an April 15 due date and an automatic extension to October 15 (https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar). Most London homeowners crossed that threshold long before they took a lodger, but the rent account must be included if it is separate. FinCEN's BSA E-Filing System at https://bsaefiling.fincen.gov is where FBARs are filed electronically. Form 8938 has its own higher thresholds and is filed with the income tax return.

What if earlier US returns left out lodger income?

Because the UK exemption is automatic and nothing is filed with HMRC, lodger income is one of the easiest items to miss for years. Where the omission was non-willful, the Streamlined Foreign Offshore Procedures are the usual route for a UK resident. The IRS requires the most recent three years of delinquent or amended returns, the most recent six years of FBARs, full payment of tax and interest, and a certification of non-willful conduct (https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states). Taxpayers who meet the non-residency test, which includes being physically outside the United States for at least 330 full days in one of the three years, and who follow the instructions are not subject to failure-to-file, failure-to-pay, accuracy-related, information return or FBAR penalties.

When amending, we rebuild the rental schedule from the date the room was first let, because depreciation that was allowable in earlier years reduces basis whether or not it was claimed. The IRS withdrew its separate delinquent FBAR submission page around July 2026, so late FBARs are filed through the BSA E-Filing System with a statement explaining the late filing, or within a Streamlined submission.

Preparation checklist for a Rent a Room year

Total calendar-year receipts, including amounts for meals, cleaning, laundry or utilities, reconciled to bank statements.
UK position for each overlapping UK tax year: under the limit, Method A or Method B, and any UK tax actually paid.
Floor plan or room count supporting the rental percentage, applied consistently to shared costs.
Date of conversion, fair market value and adjusted basis at that date, and the land and building split.
Days let at a fair rental price and days of personal use for any room also let for events.
Details of services provided, to confirm Schedule E rather than Schedule C.
Other passive category income and UK tax paid on it, for the Form 1116 calculation.
All foreign account balances for the FBAR and Form 8938 tests.

A lodger is one of the simplest arrangements in the UK tax system and one of the most frequently misreported on US returns. The pound receipts are tax-free for HMRC, but the IRS sees a rental activity with its own depreciation schedule, credit limitation and sale consequences. Getting the allocation and depreciation right in the first year avoids a far harder reconstruction when the home is eventually sold.