House rentals have become a popular option for vacationers seeking more than a basic hotel room. If you’re one of the numerous property owners renting your vacation home to paying travelers, it’s important to understand the tax rules of this particular type of rental arrangement.
To correctly handle your taxes as they relate to vacation home rental expenses and income, you must first consider the amount of rental use and the extent of personal use. When you have relatives coming to stay or you’re allowing non-relatives to stay at a price below the going market rate, tax rules treat that as personal use. This is true even when you charge relatives the full market rate for using your property.
If a property is rented out fewer than 15 days a year, the house does not fit the IRS’s definition of a vacation home rental. As such, only your regular property taxes and mortgage interest deductions apply. Any income generated is not counted as such for tax purposes, regardless of how much rent you collect during that two-week span.
It’s only when the house is rented out for 15 days (or more) per year that the tax rules and personal use limitations become relevant. When your personal use of the property is less than 15 days or less than 10% of the rental days, expenses are allocated based on a comparison of personal days to rental days. In this case, you are eligible to claim a loss.
However, when your personal use of the property is 15 days or greater and more than 10% of the rental days, the situation is a bit more complicated. In this case, after allocating expenses to personal days vs. rental days, you deduct allowable taxes and interest first, then deduct maintenance and cash expenses, and then depreciation until you reach a zero net. You are not eligible to claim a loss.
Of course, this is only a quick introduction to the important tax rules relating to vacation home rentals. For more detailed guidance on these rules and how they apply to your situation, put in a call to the tax help specialists at Taxation Solutions, Inc. We never take a vacation from bringing expert and timely tax assistance to Atlanta-area taxpayers!