Generally, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. Go to the link below and you will see the form you need to fill out for the IRS:
If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property.
You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house.
There is no change in the types of expenses deductible for the personal-use part of your property. Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it.
You do not have to divide the expenses that belong only to the rental part of your property. For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense.
If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense.
You can use any reasonable method for dividing the expense. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home.
For the state return you will do pretty much the same thing but need to get these forms:
2009 NJ-1040 New Jersey Resident Income Tax Return (Form NJ-1040) 091040
2009 NJ-1040 Instructions New Jersey Resident Income Tax Return (Form NJ-1040)
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