Do you have a vacation home you only use for part of the year? Would you like to utilize this home for extra income, but are not sure how to do it correctly? We can help you! If qualified, you may prorate any expenses incurred between personal and rental use.
The tax benefits receive are based on the number of days the home is rented out and how much time the homeowner spends using it for personal enjoyment. You can rent out your vacation home for 14 days or less and not report the income on your tax return. This is called the 14-day or 10% rule. If you use the home exclusively for personal enjoyment with no rentals, you may only deduct real estate taxes and mortgage interest on your Schedule A under the standard second home rules. However, you cannot deduct expenses such as insurance, maintenance, and utilities.
If the vacation home is rented for 15 or more days a year, it will be considered a rental property, and business, therefore the income must be reported on a Schedule E of your tax return. You may deduct expenses such as commission fees to property managers, insurance, maintenance, mortgage interest, property taxes, utilities, and depreciation. The percentage of expenses that will be deducted is based on the percentage of “rental days.” This calculation is found by dividing the number of days the home was rented by the total number of days the home was used. For example, if a vacation home had 125 total days of use, and 100 of those days were rental days, then 80% of the expenses would be deducted from your total rental income. Additionally, you may be able to deduct up to $25,000 a year in losses based on your adjusted gross income. In order to qualify for this deduction, you must own at least 10% of all interests in rental activity and must actively participate in the operations of the rental property in both the year the loss was incurred, and the year recognition is claimed. It will begin to phase out once your income reaches $100,000 and will be phased out completely at $150,000.
If you use the property for more than 14 days or 10% of the total days the home was rented, the IRS will consider your vacation home a personal residence and not a rental property. This means a rental loss cannot be deducted, but you may still be able to deduct rental expenses up to the level of rental income. This includes property taxes and mortgage interest.
Due to the 14-day rule, it is imperative that you keep track of, and document personal use days and days used for repairs and maintenance. According to the IRS, personal use days include:
Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. (Publication 527: Residential Rental Property)
You may be able to take advantage of a variety of tax benefits while renting out your vacation home. We understand that it can get complex and that tax laws change frequently. Give us a call or send us an email, and we can help you determine the best approach to renting your second home.