Whether it’s a house, apartment, mobile home, or whatever, owning a vacation home is a wonderful thing. It’s the perfect getaway, and can double as a great source of income should you decide to rent it out. Of course, any money you make from a vacation home is taxable, and at Polston want to make sure your perfect getaway doesn’t turn into the perfect headache. So here are a few things to consider, tax-wise, if you rent out your vacation home.
Personal Use vs. Rented Use
It’s important to make the distinction: Rented use refers to usage of a dwelling for which you receive income. Personal use refers to use of a dwelling by any owner(s), their families, or anyone who pays less than a fair rental price. In other words, if you’re getting paid a (fair) price, that’s considered rental use. Anything else is personal use.
The IRS defines a fair rental price as “generally the amount of rent that a person who is not related to you would be willing to pay”. A price is considered unfair if it’s “substantially less” than rents charged for similar properties in your area. The U.S. Department of Housing and Urban Development keeps an up-to-date registry of Fair Market Rates here.
If you’re using a vacation home for both rental and personal purposes, you must divide expenses based on the number of days used for each purpose. Any day that the dwelling is available for rent is considered a day of rental use, even if it’s not occupied.
The IRS considers a vacation house to be “used as a home” if personal use lasts either 14 days or 10% of the total days the house is rented to others (whichever is greater). If you live in a house for an extended period, and meet either of the above criteria, the IRS considers your vacation house a home, which will affect your deductions.
For a more detailed explanation of personal vs. rented use of a vacation home, check out Publication 527.
How to Deduct for a Vacation Home
Any expenses accrued during personal use of a vacation home (mortgage, interest, theft, etc.) should be itemized on Form 1040, Schedule A. There’s also a special rule: If you use a dwelling as a personal residence and rent it out for fewer than 15 days, you don’t need to report any rental income, but you’re also unable to deduct any expenses.
If the IRS considers the property “used as a home”, your deductions for rental expenses can’t be more than the rent you received.
Any money made or lost from the rental of a property are considered supplemental by the IRS, and should be itemized on Form 1040, Schedule E, which covers supplemental income and loss. Any rental income may be subject to the Net Investment Income Tax, a general investment tax which includes rental income alongside income accrued from annuities, capital gains, royalties, etc.
Or maybe what you’re looking for is relaxation, pure and simple. If that’s the case, then give us a call. It’s our job to make sure you can enjoy your vacation home any time of the year, and that includes tax season. Be sure to browse our services page and fill out the form for a free consultation. Or give us a call at 844-841-9857!