This is an old thread, but there is a lot of incorrect information here. When you rent out rooms in your home, your deductions are limited to the amount of rental income. This is based on 280A(c)(5), and this has been upheld in tax court. This limitation doesn't apply if the tenants have a separate "dwelling unit" (such as a duplex, where the rental portion has its own kitchen, etc.), but if they are sharing your "dwelling unit", then your deductions are limited to your rental income. The $25,000 loss allowance doesn't apply. But there is an exception for short-term rentals.
For people who prefer to see an IRS source, see IRS publication 415:
"If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won't be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest, real estate taxes, casualty losses, and rental expenses like realtors' fees and advertising costs). However, you may be able to carry forward some of these rental expenses to the next year, subject to the gross rental income limitation for that year. If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you may still be able to deduct your personal portion of mortgage interest, property taxes, and casualty losses from federally declared disasters on that schedule."
If you want to read how it plays out in tax court, see FRANK SHIH v. COMMISSIONER (1997).
"Each tenant had exclusive use of his or her bedroom and, along with petitioner, had access to and the right to use the common areas of the house, including the kitchen, living room, dining room, bathroom, and laundry room." ... "Taking into account petitioner's personal use of the San Bruno residence during the qualified rental period would, based solely upon such use, give rise to the application of section 280A(c)(5). Because petitioner continued to use the San Bruno residence for personal purposes (as his residence) while attempting to rent out the remaining bedrooms, he cannot rely upon section 280A(d)(4) to avoid the application of section 280A(c)(5). See Walsh v. Commissioner, T.C. Memo. 1987-18."
"If a taxpayer uses a dwelling unit for rental purposes and as a residence during the taxable year, section 280A(c)(5) limits the deductions attributable to the rental use of the dwelling unit to an amount not to exceed the excess of the gross rental income derived from the rental use over the sum of: (1) The deductions allocable to the rental use that are otherwise allowable regardless of such rental use (such as mortgage interest and real estate taxes); plus (2) any deductions that are allocable to the rental activity in which the rental use of the residence occurs, but that are not allocable to the rental use of the residence itself. As a result, a taxpayer cannot normally offset against unrelated income a net rental loss incurred from, and attributable to, the rental use of the taxpayer's residence. Feldman v. Commissioner, 84 T.C. 1, 5 (1985), affd. 791 F.2d 781 (9th Cir. 1986)."
