Q: We purchased a vacation home several years ago. This year, our summer schedules with the kids and our jobs will keep us at home. If we rent it out, what tax issues do we need to consider?
A: Well, there are three actual scenarios that you should consider, and here are overviews of each of them. Be sure to talk to your CPA or financial advisor to get further detail on each:
1. Your family uses the home for 14 days or less or for less than 10% of the days during which the property is rented. The home will be considered a rental property. You’ll have to report the rental income but may be allowed to deduct rental expenses (including depreciation) subject to the passive activity loss rules. You won’t be able to deduct their personal portion of expenses against the rental income, although you may be able to take an itemized deduction for certain personal expenses.
2. Your family uses the home for more than 14 days or for 10% or more of the days during which it’s rented and rent it for 15 days or more. The property will be considered a personal residence. You will have to report the rental income, although you could still take itemized deductions for the personal portion of mortgage interest and property taxes, and, perhaps, other expenses.
You may also still deduct the rental portion expenses up to the amount of the rental income. If rental expenses exceed rental income, however, you cannot deduct the loss against other income. You can, however, carry forward the excess rental expenses.
3. You rent out the home for less than 15 days. You won’t have to report any rental income. But you won’t be able to deduct any rental expenses, either.
Strict distinction
The IRS draws strict distinctions between personal use and rental use.
Any time spent by your family, other relatives, home exchange partners or anyone who doesn’t pay fair market rent will count as personal use. (There is an exception for full days spent on repairs and maintenance.) Even if family members pay fair market rent, the IRS will likely deem it personal use.
For more information on this topic or many other tax, business and investment topics, contact your CPA, Business Advisor, or Deborah Thornberry, CPA, dthornberry@vlcpa.com.
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