Summer home rentals net some owners tax-free income
Monday, June 11, 2018
School's out. Summer is here, at least unofficially judging by the temperatures.
And thousands of Americans are planning vacations.
There also are a sizable number of homeowners hoping to make some extra bucks off all those seasonal travelers.
Home rental popularity: Alternative accommodation, as the segment is known in the industry, appeals to those looking to immerse themselves in a new place culturally.
Other opt for such lodging for the privacy (no paper-thin hotel walls), convenience (cooking meals instead of always eating out; use of the owner's Wi-Fi or streaming services) or amenities (a private pool) of a personal home or apartment.
And, in some cases, vacation home rentals are more cost effective.
They also can be a great source of tax-free income, in certain cases, for the folks leasing their homes.
Short term, no tax: When you rent your primary home or vacation residence short-term, you don't have to report that rental money as income. The time limit is renting the place for 14 or fewer days in a year.
Such short-term rentals are most common when there's a special event — presidential inauguration, big sporting event (Super Bowl, college basketball tournament) or music festival — in an area.
Locals want to escape the crazy and crowds, so they make money off the tourists eager for lodging during a time when traditional accommodations are scarce.
Three rental and tax situations: Other homeowners, however, opt for more rental days and use the Internal Revenue Code to minimize the taxes due on such accommodation offerings.
Basically, there are three second-home tax situations:
- You rent the property to others most of the year.
- You rent the property to others for a very short time.
- You use the property yourself and rent it when you're not there.
Each rental circumstance has tax implications. Option number 2, as noted earlier, offers the best tax result. Added income, no tax bill.
The other options, while they do produce taxable rental income, also can be profitable. However, they take some work and record keeping.
Defining a rental property: First off, lets clear up what can count as a vacation rental. It could be a true vacation home, but it doesn't have to be.
The IRS says your vacation home also may be an apartment, condominium, mobile home, RV or boat.
As with the home definition for the more traditional deductions (mortgage interest, real estate taxes), as long as it has sleeping, cooking and toilet facilities, it's a home.
Second home, full-time rental: If you do have a cabin on the lake or a chalet on the ski slopes or a beach house, but you don't use it any more, you can sell it and pocket the profit. That, of course, will mean you'll pay capital gains on the sale profit.
Or you can rent it out as much as possible.
Vacation home owners who have a mortgage on the property often find that rental income covers most of those bank payments. If the retreat is paid off, that's even better. It means more money for you.
In either case, though, you'll owe tax on the income since the place will be leased by lodgers for more than two weeks during the year. As in other tax situations, you can help reduce the amount of taxable income by deducting common rental expenses.
The IRS says these include advertising, cleaning and maintenance, commissions for brokers, depreciation, insurance, legal and other professional fees, repairs, utilities and even the property taxes on the vacation home.
Your and others' stays: If you still use your vacation home (or primary residence) but also rent it out for more than the no-tax two-week period, taxes get a bit trickier.
This is where meticulous record keeping come into play.
As with full-time rentals, you can reduce taxes on any rent you collect by deducting eligible expenses. But since you were there part of the time, you'll have to allocate those costs for the shared personal and rental use.
Say, for example, you spent 60 days last year during ski season at your mountain cabin and rented the property for another 180 days. You can deduct three-quarters of your vacation home's eligible rental expenses against rent you collect since the 180 rental days divided by 240 total days of property use comes to 75 percent.
Note, however, that the most this will get you is zeroing out your rental income.
When the rented property also is used as your personal home, the rental expense deduction is limited to the amount of rent received. You can't claim rental losses in these hybrid home occupancy/rental situations.
Home, vacation rental tax help: Yes, renting your home or vacation property can get complicated.
You'll have a new form, Schedule E, to report your rental income and expenses. Rental income also may be subject to the 3.8 percent Net Investment Income Tax (NIIT).
Tax software can help.
The IRS also has online information you can peruse:
- Tax Topic 415, Renting Residential and Vacation Property,
- Publication 527, Residential Rental Property (Including Rental of Vacation Homes), and
- Tax Tip 2018-79, Plan ahead for vacation home rentals.
I suggest, however, that you get help from a tax professional who's experienced in the nuances of real estate taxation.
Not only will he or she help you pay the least amount of tax on your primary or second home rentals, remember those legal and other professional fees that can be deducted.
You also might find these items of interest:
- Private, and often untaxed, home rentals under fire
- Pope's visit pumps tax-free rental income into Philly
- Dealing with a 1099-K for tax-free residential rental income
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