My grandparents have a vacation house along the coast that they rent to friends and acquaintances from time to time. Like many other property owners, they think it’s a great way to generate a little extra income. While this may be true, people often overlook the vacation rental tax rules that are associated with earning that extra income.
Is My Vacation House Personal or Rental Property?
If you rent out your beach house for more than 15 days during the year, it’s considered a vacation rental. This also means you’re required to report the income. In comparison, vacation rental tax rules for properties that are rented for a majority of the year are very different. Cabins, apartments, condominiums, mobile homes, boats and all other structures belonging to the dwelling unit count as a “vacation home” and are subject to the tax rules.
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Taxes on Vacation Homes
The simple way to avoid tax on your vacation home is to use the home personally and rent it out for less than 15 days per year. If the home is rented 15 days or more each year, then the rental income must be reported as taxable income on Schedule E. The rental income may also be subject to net investment income (NIT) taxes.
Tax Write-Offs For Vacation Rentals
Of course, you can offset rental income tax by deducting rental expenses. If the property is used personally for part of the time, the expenses (mortgage interest, utilities, HOA dues, maintenance, etc.) must be allocated between rental and personal use. The allocation between rental and personal use is also based on the number of days the property is used for each purpose. If you lose money on the time you rent it out and a net loss is generated, that loss would generally be subject to passive loss limitations. Passive losses can be used to only offset passive income. This means the loss can only be taken if you have other passive income. It cannot be applied against earned or ordinary income such as wages, interest or other business income.
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If the property is used as a personal “home” for part of the time, the rental expense deduction is limited to the rental income received. This is a tricky little caveat because the IRS considers it a “home” if you used it more than 14 days or 10% of the days of rental use.
If you need help deciphering any vacation rental tax rules, feel free to contact our office. We’d be happy to help.
By: Sarah Moore, Manager at WHH
