Renting out a vacation home has tax consequences
Implications of renting out a vacation home
- You do not declare rental income if you rent out your home for 14 or fewer days per year.
- If you rent for more than 14 days, you can deduct rental expenses on your income taxes.
- Keep track of personal-use days and rental days to determine your allowable deductions.
- Maintenance days do not count as personal-use days.
Many people own vacation homes at the beach, a lake, in the mountains — or just somewhere away from phones, work and stress. Not everyone, however, realizes they can rent out their vacation home when they're not using it to help pay the mortgage, or even to make a profit. Of course, as with everything in life, there are tax rules that cover this monetary venture.
Length of rental time
Interestingly, the Internal Revenue Service will allow you to rent your vacation home for up to 14 days each year without reporting that income. In fact, this rule holds true for your main residence as well. In addition, you still get to deduct the interest on your mortgage and the property taxes from your home or qualified second home as normal on your income tax return. You cannot, however, deduct any expenses incurred from renting the property for those two weeks.
The tax rules get more complicated if you rent your vacation home for more than 14 days in a year. First and foremost, you must report that income on your income tax return. Second, you must keep track of the number of days the vacation home was rented and the number of days it was used by the family for personal reasons. If you use the home for 14 or fewer days (or less than 10 percent of the total days it is rented per year), the vacation home is considered a full-time rental.
Full-time rental implications
With a full-time rental, not only can you deduct mortgage interest and property taxes, you also can now deduct rental expenses, including things like cleaning, maintenance, advertising for renters, property-management fees, and even transportation costs incurred when maintaining the home. In addition, you also can deduct bigger expenses like utilities, property insurance, home repairs and depreciation. As a business, these deductions even can exceed your rental income (allowing you to declare a business loss). Check with your tax attorney about the maximum loss you can claim.
If you use the vacation home for personal reasons for more than 14 days (or 10 percent of the total rental days), you can deduct all of the same rental expenses, but the property is still considered a personal residence, so you can only deduct the percentage of expenses equal to the amount of time the home was rented out. You also can't claim a business loss — although there are other ways you can ease your tax burden if property-related expenses exceed revenue. Check with your tax attorney.
Maintenance days do not count as personal days, so any time you travel to your vacation home to clean, perform repairs, show it to prospective tenants, etc., those days do not count as personal-use days. Any personal use by any family member (even if they are paying rent for being there), however, or any use by a anyone for less than market price, including any "donated" use (as a prize in a charity auction, for example) does count as personal use.
Finally, don't forget that if you rent out your vacation home, you also may need to pay state and local taxes on the rent you collect. In addition, you might want to have your attorney check on local zoning ordinances, homeowner-association rules, business permits required by your state or local government, and safety and health code regulations you may need to follow. Luckily, you can deduct those attorney fees as expenses related to your "cottage" industry.