Now that it is midsummer, if you own a vacation home that you both rent out and use personally, it is a good time to review the potential tax consequences:
If you rent it out for less than 15 days: You do not have to report the income, but expenses associated with the rental (such as advertising and cleaning) will not be deductible.
If you rent it out for 15 days or more: You must report the income, but what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal versus rental use:
- Rental property. If you (or your immediate family) use the home for 14 days or less, or less than 10 percent of the days you rent out the property, whichever is greater, the Internal Revenue Service (IRS) will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You cannot deduct any interest that is attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.
- Non-rental property. If you (or your immediate family) use the home for more than 14 days or 10 percent of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property tax.
Look at the use of your vacation home year-to-date to project how it will be classified for tax purposes. Adjusting the number of days you rent it out or use it personally between now and year-end might allow the home to be classified in a more beneficial way.
For assistance, please contact us.