Over the last five years, the number of people offering their vacation properties for rent has boomed in order to offset expenses and generate income. On the basis of the number of days of the year the property is let out, vacation home owners can avail of certain tax benefits and avoid surprises at tax time.
· If the vacation home is used as a residence and is rented out for 14 or fewer days that year, there is no need to report any of the rental income.
The best example of this exemption would be vacation home owners near major golf clubs, Super Bowl sites or national political conventions who can earn a fortune by renting out their homes for about 2 weeks, and get to pocket the rental income tax-free. For instance, home owners near the Augusta Golf Club earn as much as $20,000 during the annual tournament. Here, the taxpayer cannot deduct maintenance or depreciation costs, but can deduct mortgage interest, casualty losses and property taxes on Schedule A.
· If the vacation home is rented out for 15 days or more and used by the owner for 14 days or less, it is deemed a let out property and all rental income must then be reported to the IRS.
The owner can deduct certain rental expenses such as fees paid to property management firms, insurance premiums, maintenance expenses, mortgage interest, property taxes, utilities and depreciation. The amount of deductible rental expenses is calculated by dividing the number of days the home was rented out by the number of days the home was used (rental plus personal use). For instance, let us assume a home owner has rented out his beach house from January through April, and his family uses it for two months starting from July through September. Then, the vacation home has been used for 153 days out of which 91 days were rental days. 60% of the expenses (91 rental days/153 days of total use) can then be deducted against the rental income. The remaining 40% of the rental expenses are non-deductible.
· If the personal use is less than 10% of the days rented, however, then joint filers with $100,000 or less of adjusted gross income can deduct up to $25,000 of losses against their ordinary income.
· If the vacation home is exclusively used by the owner, and not rented out at any time of the year, real estate taxes and interest on home mortgage can be deducted. If personal use is greater than 14 days or greater than 10% of the number of days rented out, the property is deemed residential, and the deductible rental expenses would be limited to the amount of rental income.
As tax laws are complicated, please feel free to consult with our specialists at GKM to gain a comprehensive understanding of tax laws and how best to utilize a vacation home for rental purposes.