Many people rent out their vacation homes. Collecting seasonal rents can help offset some of your costs of ownership. While the opportunity for additional income is enticing, the tax reporting can be daunting.
General Rental Rules
Depending on which type of rental property you own, your deductions may be limited or even completely disallowed. In many cases, the deductions allowed are limited based on a combination of your personal use of the property and the number of days rented, which can often be quite difficult to compute. The chart below summarizes the general tax treatment of income and expenses.
|Rental Property Summary|
|Days Rented||< 15 Days||> 15 Days||> 15 Days|
|Personal Use Days||> 14 Days||< 15 Days OR 10% of Rented Days||> 15 Days OR 10% of Rented Days|
|Income||Rental income is not reported.||Report all rental income.||Report all rental income.|
|Expenses||No deductions taken on Schedule E.||Take deduction for rental expenses on Schedule E. Expenses are split between rental and personal usage. Portion allocated to Personal Usage is disallowed as part of deductions on Sch. E.||Take deduction for rental expenses on Schedule E. Expenses are split between rental and personal usage. Portion allocated to Personal Usage is disallowed as part of deductions on Sch. E. Expenses are limited to the amount of total income.|
|Other||Real estate tax & qualified mortgage interest is deductible on Schedule A.||Personal usage portion of real estate tax & qualified mortgage interest is still deductible on Schedule A.||Personal usage portion of real estate tax & qualified mortgage Interest is still deductible on Schedule A.|
|Losses||N/A||Losses are subject to Passive Activity Loss Rules. $25,000 Special Allowance may apply if taxpayer actively participates.||Losses must be carried forward and offset against future income on this property.|
Days Used for Repair and Maintenance
In determining whether a day is used for repair and maintenance versus personal use, the general rule is that any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. In addition, it is generally impermissible to categorize a day as a day of personal use if family members use the property for recreational purposes on the same day as maintenance and repairs are occurring.
Renting to Family Member
According to IRS guidelines, a relative consists of your spouse, siblings, ancestors, lineal descendants, and spouses of lineal decedents. The usage of a rental property by any of these family members will be considered a personal use day unless the family member pays fair market value or comparable price to rent the property and the property is their main home (short-term vacation rentals to family, even at fair market value, are considered personal use days). Days rented at a discounted rate are considered personal use days and the portion of the once deductible expenses is disallowed. In either case, even though your deductions are disallowed, any rental income received must still be reported.
When determining the fair value rental price of your property, it is generally advisable to start by reviewing comparable rental properties in the area. You may also be able to obtain a quote from a local rental business or real estate professional. When making a determination of fair rental price by consulting similar rentals in the area, you may want to consider the following:
- Is it approximately the same size?
- Does it have similar furnishings?
- Is it in approximately the same condition?
- Is it in a similar location?
It is a good practice to document your basis in determining the fair rental price and keep it with your tax return records.
Here is a listing of some of the most common deductions related to a rental property:
- Cleaning and Maintenance
- Legal & Professional Fees
- Mortgage Interest (Personal Use Portion Deductible on Sch. A)
- Taxes (Personal Use Portion Deductible on Sch. A)
- Condo Fees
Donating the Use of Rental Property
You cannot donate the usage of a rental property or a vacation home and claim a subsequent deduction. The gift of right to use property is not a deductible contribution. Any day a property’s use is donated is considered a personal use day.
Rental Property Tips
- Maintain accurate and timely records of rental income and expenses
- Track personal days, Repair/Maintenance days, and fair rental days
- Always use a fair rental price and review annually.
Please feel welcome to contact your Moneta Group advisory team or Tax Strategies with any questions on this topic!