Summer is in full swing, finally! For many families this means ice cream, swimming, travel and enjoying the great outdoors. For many families it also means visits to a summer home and for some, renting out the summer home to visitors. Renting out a vacation home can often times help offset some of the expenses. This can be very beneficial as long as the rental activity is in accordance with Internal Revenue Service guidelines and rules.
A home is considered a residence if you use it for personal purposes for more than the greater of 14 days or 10% of the total number of days you rent the home at fair rental value. If you rent out your vacation home for 14 days or less – the rental income you receive is not required to be reported on your income tax return. The property will be considered personal use. The expenses you would normally deduct on your income tax return such as mortgage interest and property taxes will generally still be fully deductible for taxpayers who itemize their deductions.
The IRS views you as a landlord if you are renting your home out for more than 14 days. Any rental income received must be reported on your income tax return. You may also deduct any expenses incurred as a result of the rental activity and only those expenses attributable the time the home was rented. If the home was not rented for the full year, you will need to prorate your expenses using the following ratio: number of days of rental use divided by the total number of days used for business & personal purposes.
In addition to mortgage interest and taxes, other deductible rental expenses may include: maintenance, utilities, advertising, commissions, insurance and depreciation. Detailed recordkeeping in this situation is essential!
Should your rental expenses exceed the rental income, this will result in an overall net rental loss. A rental loss may offset other types of income you report on your tax return depending upon your participation in the activity. The passive-activity loss limitations, however, may limit your deductible losses. There is a special allowance of up to $25,000 from rental real estate activities that can be used to offset other types of income. This special allowance is subject to certain income limits.
To be considered a home, the dwelling must have certain features including sleeping quarters, a bathroom and cooking amenities. Examples of a home include a house, apartment, condominium, mobile home, motor home or houseboat.
For more information, contact Lisa A. Mrkall, CPA, MBA, Principal at Tronconi Segarra & Associates, 716.633.1373 or lmrkall@tsacpa.com.
