Question: I will be renting out my vacation home for part of the 2018 year. If I have income from the rental, do I have to pay tax on the income? Alternatively, if I have a rental loss, can I deduct the loss?
Answer: If you rent your vacation home for less than fifteen days during the calendar year, you need not report nor pay tax on the rental income. By adjusting the rental period, you can receive tax-free income. At the same time, you cannot claim deductions for expenses attributable to such short-term rental. However, certain expenses which are deductible regardless of whether or not you rent the home such as mortgage interest and real estate taxes can be claimed as deductions.
If you rent your vacation home for fifteen days or more during the year, then you must report and pay tax on the rental income. In this case, you can claim deductions for rental expenses such as depreciation, utilities and other costs incurred with respect to the property. These expenses must be prorated as tax deductions are allowed only for the portion of the year during which the property is rented. Mortgage interest and real estate tax payments are also deductible in these circumstances.
If you have a loss from your rental activity, certain requirements must be satisfied to deduct your rental loss. If you use the home for more than the greater of fourteen days or ten percent of the number of days the property is rented, then the home is considered personal use property and you cannot deduct your rental loss. Even if your personal use of the property is limited to fit within the foregoing requirement, there is an additional limit on the amount of rental losses you can deduct for the property. Rental activities are generally treated as passive and the deduction of losses from passive activities is subject to various limitations which depend upon your tax position.
Certain rules apply in determining whether your personal use exceeds fourteen days or ten percent of the number of days the property is rented. Personal use time includes not only the time you actually use the property but also the time a family member uses the home. Also considered personal use time is the time any other person uses the home and pays less than a fair market value rental for the period of use. You are allowed to exclude as personal use any time you spend at the home repairing or maintaining the property.
Short-term vacation home rentals are an effective means of generating tax-free income. Loss deductions are more of a challenge as there are various hurdles which need to be satisfied. However, proper planning with your vacation home can yield meaningful tax benefits.
The Tax Corner addresses various tax, estate, asset protection and other business matters. Should you have any questions regarding the subject matter or if you have questions you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfnr.com.
