Renting Your Vacation Home: Tax Benefits and Challenges by Joanie B. Stein, CPA
Posted on June 14, 2017 by Joanie Stein
Purchasing a vacation home provides an individual with a place to get away and relax as well as an opportunity to generate significant cash flow when they rent out those properties throughout the year. However, the IRS will generally consider the rent paid by tenants to be taxable income to the owner and potentially subject to an additional 3.8 percent Net Investment Income Tax.
Whether renting out a home, a condominium, a room or even a boat, taxpayers must understand their rights and responsibilities in order to maximize the benefit of these properties without incurring additional costs.
Sources of Rental Income
Rental income on property may include rent paid by tenants, expenses paid by tenants for repairs or utilities, and costs charged to tenants for early lease termination. Also included in reportable rental income is the fair market value of services provided by tenants in lieu of rent as well as security deposits, when owners use such payment as advance rent for the last month of a lease. However, owners do not need to report security deposits retained for future damages and intended for return to tenants until the time when the owner actually keeps the money.
Exception to Rental Income Reporting
Owners of vacation property must report on their personal U.S. tax returns all sources of rental income and expenses on Schedule E, Supplemental Income and Loss, unless they use the property as their own residence and rent it out fewer than 15 days per year.
Deducting Vacation Home Rental Expenses
In most cases, owners of vacation homes may deduct from their rental income those expenses incurred for maintaining, managing and renting the property, including, but not limited to, insurance, maintenance, taxes, interest and professional fees. However, these deduction are subject to limitations.
For example, if the property is used by the owner for personal use for more than 14 days, deductible expenses will be limited to an amount that does not exceed gross rental income. Another exception applies when property owners rent their vacation homes to family members or anyone else who pays less than a fair rental price. In these instances, property owners must divide their expenses between the number of days they use the property for personal use and the number of days they rent it out to others.
Property owners may deduct some of the costs associated with vacation homes by depreciating the portion of the property’s value used for rental each year. Depreciation begins in the year in which the owner readies the property for income-producing activities and ends when the owner sells the property or converts it to personal use.
The advisors and accountants with Berkowitz Pollack Brant understand the complexities of owning and renting vacation properties and work closely with domestic and international clients to maximize tax efficiencies related to these matters.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at firstname.lastname@example.org.