Insight

Vacation Home: How is your Tax Bill Affected if you Rent it Out?

Vacation Home: How is your Tax Bill Affected if you Rent it Out? | business consulting services in baltimore md | WCS

If you’re fortunate enough to own a vacation home, you may want to rent it out for part of the year. What are the tax consequences?

The tax treatment can be complex. It depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by you, your relatives (even if you charge them market rent) and use by nonrelatives if a market rent isn’t charged.

Less than 15 Days

If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce revenue and significant tax benefits. Any rent you receive isn’t included in your income for tax purposes. On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs or depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent received in income. However, you can deduct part of your operating expenses and depreciation, subject to certain rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, 75% of the use is rental (90 out of 120 total use days). You’d allocate 75% of your costs such as maintenance, utilities and insurance to rental. You’d also allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. The personal use part of interest on a second home is also deductible (if eligible) where the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

Claiming a Loss

If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes.

Here’s the test: if you use it personally for more than the greater of a) 14 days, or b) 10% of the rental days, you’re using it “too much” and can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t create a loss. Deductions you can’t use are carried forward and may be usable in future years. If you’re limited to using deductions only up to the rental income amount, you must use the deductions allocated to the rental portion in this order: 1) interest and taxes, 2) operating costs and 3) depreciation.

If you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under passive loss rules.)

Planning Ahead

These are only the basic rules. There may be other rules if you’re considered a small landlord or real estate professional. Contact us if you have questions. We can help plan your vacation home use to achieve optimal tax results.

 

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

 

© 2021

 

Related Insights

Want to turn a hobby into a business? Watch out for the tax rules | accountant in bel air md | Weyrich Cronin & Sorra

Tax Prep, Planning & Strategy

Want to turn a hobby into a business? Watch out for the tax rules

Like many people, you may have dreamed of turning a hobby into a regular business. You won’t have any tax headaches if your new business is…
Businesses may receive notices about information returns that don’t match IRS records | accountant in harford county md | Weyrich Cronin & Sorra

Tax Prep, Planning & Strategy

Businesses may receive notices about information returns that don’t match IRS records

The IRS has begun mailing notices to businesses, financial institutions and other payers that filed certain returns with information that doesn’t…
Valuable gifts to charity may require an appraisal | tax preparation in hunt valley md | Weyrich Cronin & Sorra

Tax Prep, Planning & Strategy

Valuable gifts to charity may require an appraisal

If you donate valuable items to charity, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply…

Connect with us

Use the form below to send us an email. WCS responds directly to all inquiries and general questions within 24 hours of posting.

This contact form is deactivated because you refused to accept Google reCaptcha service which is necessary to validate any messages sent by the form.