Tax Implications for Renting out Rooms in Primary Residence

[Mike Rodrigues]

Hi guys, I have searched the internet far and wide, but still have some questions/concerns for filing my taxes this year.

Basically, I own a 3br 2.5Ba townhome that i purchases for 140k with 40k down, my total payment with taxes and insurance is ~$840/mo. The entire home if I did not live in it would rent for 1,500. I have a girlfriend and her friend living in the home and I don't charge all that much to them to live there. I charge $300 per month each, so $600/mo and we split the utilities 3 ways. I am earning $7,200 per year from them, I have the electric plus water/sewer, HOA and the minor upkeep I had this year they add up to exactly $7,200 (oddly).

When I tried to do the taxes myself, I said I rented out 40% of the house, I live in one LARGE master with me and my gf with its own bath. The other girl lives in a 12x12 room and has her own bathroom that she uses exclusively. This took away from 40% of my mortgage interest that could have been deducted, I did a second trial return without the rental income and I got about $500 more back.

That being said, I am not interested in cheating the government, and (I think) I want the income to show for when I try to buy my first investment property to buy and hold later this year. Given I am renting for less than market value I am afraid that makes me look like a bad investor.

As far as the tax implications go, I think I am charging below fair market value, but I am not really sure given I am living in the house. How does this affect my situation?