Tax Tips for Renting Out Your Vacation Home

What to do with your Vacation Home after Vacation

Vacation time is over and your family is getting ready to return to life in the faster lane. What do you do with your vacation home? Will you close it up for the rest of the year? Will you rent it out so that others may benefit? If you choose to rent out your vacation home, there can be tax implications.

Rental Income - Rental income in general is taxable. If you rent out your vacation home for less than 14 days, the income is tax free. If your renter stays more than 14 days you need to report the income on your tax return. You can deduct rental expenses, but your deductions are limited because the amount of expenses you can deduct depends on whether the property is a business or a personal residence in the eyes of the IRS. The IRS determines this by calculating the proportion of personal use to the amount of time you rent the property. If you use your vacation property for less than 14 days or less than 10% of the time you rent the property, the IRS classifies your rental as a business. If you use your property for longer than the 14 days or 10% of the time it is rented, the IRS will classify your rental as a personal residence.

Deductions - Renting out your property will also incurr some expenses. Depending upon how the IRS classifies your property will define what you can claim as a deduction. If classified as a business, you have to apportion eligible deductible expenses (i.e., cleaning, repairs, utilities) according to the amount of personal or rental usage. To determine the percentage of expenses you can deduct, divide the number of days rented by the total number of days of used (personal days plus rental days). Once you have that, your expenses can be itemized on your tax return.

If your rental is classified as a personal residence, you are able to deduct things like property tax and mortgage interest along with the itemized expenses.

Record Keeping - As always, it is important to keep accurate, detailed records. Items you will want to keep include receipts and invoices, mortgage statements and the like. Keeping a record of all improvements and repairs made to the rental is also of high importance. Having a separate checking account especially for the rental property can make documenting your rental expenses easier.

Audit Proofing Your Rental - Always treat your rental as a business. To keep the IRS uninterested in you, you need to make sure that you look like a business. Keep clean books, have separate bank accounts, and make sure you keep accurate records of repairs. Keep those receipts. “Audit-proof” your rental property just as you would “baby-proof” your home, it just might keep both you and your property a little bit safer.

If you have any questions regarding renting out your rental property, please contact us. The specialists at The Tax Office, Inc., can provide you with answers, show you what deductions are available to you and much more.