With summertime upon us we are out enjoying the sunshine, fresh air and warm temperatures. It may also involve taking a much-needed getaway. For some, that means a trip to their vacation home. Owning a second property that you treat as a vacation home has it benefits. Not only does it provide a place to escape to but it can also provide supplemental income if it is rented out when not in use by the owner. However, navigating the tax rules that are involved can be tricky.
Generally, vacation homes fall into one of three scenarios:
The home is rented out almost the entire year
The home is used personally almost the entire year
The home use is split between rental and personal use
The home is rented out the entire year:
Rents received are taxable, but expenses associated with renting the property are typically deductible. In addition, the owner may be able to take a loss on the property as long as the personal use doesn't exceed 14 days or 10% of the time the property is rented out, whichever is greater.
Some of the common deductible rental expenses include advertising, cleaning & maintenance, depreciation, insurance, mortgage interest, management fees, repairs, taxes and utilities.
Remember to keep in mind that a day spent working on the property or doing repairs does NOT count as a "personal use" day. Therefore it is possible to allow for more time at the getaway without risking the loss deduction.
Under the "passive activity loss" rules, if the property incurs a loss for the year, it is generally limited to the amount of income from other passive activities.
The home is used personally almost the entire year:
The IRS does provide a small benefit for those people renting their vacation home for a minimal amount of time. If the home is rented out for two weeks or less, the home owner does not have to report any rental income received during these 14 days. Thus, it is possible to take advantage under the short-term rental rules, to receive rental income and not pay any taxes on that income if there is a special event taking place nearby, such as a golf tournament or outdoor festival.
The home use is split between rental and personal use:
This is the most complicated scenario. Generally rent income is taxable, but deductions are limited. Deductions are first allocated between personal use and rental use. The amount of the deduction is limited to gross income derived from the rental use for that tax year.
It is important to keep track of personal use - if the owner can keep personal use below the 14 day/10% limit, they may be able to claim a loss, subject to the passive activity restrictions.
Please feel free to contact us with any questions you may have regarding the information above, or if there is another way we can serve you.