Rental Taxation Rules For Your Vacation Property

Rental taxation has gotten a bad rap from the masses of people that, quite frankly, don’t understand it. More often than not, rental property taxation isn’t seen as the truly great benefit it really is: a great tax shelter. When all is said and done, vacation rental owners should look forward to each and every tax season, as they’ll award savvy entrepreneurs an opportunity to detract from their taxable income. It is worth noting, however, that nobody is going to simply take care of your taxes for you; no, you need to have everything in order to take full advantage of the benefits. Therefore, it’s in your best interest to know everything about the rental taxation rules for your vacation investment property if you hope to elevate your business to a whole new level.

Define Vacation Home

A vacation home is exactly what many people naturally presume; it’s a home used for recreational purposes that isn’t the owner’s primary residence. Or, as Invstopedia describes it, “a vacation home is a dwelling other than the owner’s primary residence that is used for recreational purposes, such as vacations.” Not surprisingly, vacation homes have become synonymous vacations, and typically act as a living space when one decides to leave their primary residence for a “short” period of time. That said, it’s not the definition of today’s vacation homes that confuse investors, but rather the rental taxation practices that coincide with them. You see, when the owners aren’t using them, vacation homes are typically rented out, subjecting the property to all sorts of taxable scenarios, which begs the question: what are the rental taxation rules of vacation homes?

The amount of time the home is used and who it is used by will subject it to different tax standards. According to the IRS, “if you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct.” That said, the vacation home is considered a personal residence if you use it for personal purposes during the tax year for more than the greater of:

• 14 days, or
• 10% of the total days you rent it to others at a fair rental price

The amount of time you spend in the home will determine how to proceed with taxes. “There’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses,” says the IRS website.

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Vacation Rental Taxation Rules That’ll Determine Your Taxable Income

As I already alluded to, the amount of time you spend in your own property will change the way it’s taxed. Here’s how:

• The 14-Day Rule: Vacation rental property owners that rent their home out for 14 days or fewer over the course of a year do not need to report the rental income on their tax return for the same year it was earned.

• The 14-Day Rule (Continued): In the event vacation rental property owners are able to rent their property out for more than 14 days, they must claim the income they earn on their tax return. It is worth noting, however, that once you pass the 14 day threshold you are allowed to deduct rental expenses.

• The Personal Residence Rule: The IRS will view vacation homes that are lived in by the owner for more than 14 days or more than 10% of the time it is actually rented out (whichever is greater) as a personal residence. That’s an important distinction to make, as owners will be able to deduct rental expenses. It is important to note, however, that they can’t deduct losses.

• The Personal Residence Rule (Continued): The IRS will view vacation homes that are lived in by the owner for less than 15 days, or that have limited their personal use of the property to 10%, as a business. As a business, owners can deduct expenses, and maybe even losses (depending on the income).

Does My Vacation Home Qualify For Rent Tax Deduction?

The powers that be at the IRS have awarded most vacation homeowners the ability to decrease their taxable income. It is worth noting, however, that the number of deductions vacation homeowners can take is directly correlated to several inherent variables, not the least of which include how often the homeowner uses the property personally and whether they allow renters on a regular basis. Refer to the rules above to give yourself a better idea as to whether or not your home qualifies. Of course, as always, consult a tax professional before you make any deductions on your own vacation home, as the corresponding rules and regulations can get complex rather quickly.

Rental Property Taxation Tips For Vacation Home Owners

Here are some often overlooked tips to keep in mind when owning and operating your own vacation rental property:

• Get Familiar With The 14-Day Rule: The IRS has made it readily apparent that its cutoff for personal use and business use is exactly two week, or 14 days. According to the rule, vacation rental owners don’t pay taxes on income if they rent the property for less that 15 days out of the year and use it themselves for 14 days or more over the course of the same year (at least 10% of the total days you rent it to others). With that in mind, plan your rental strategy accordingly. Sometimes renting out the vacation home for less than 15 days may be a wise move. If the home is rented out for 14 days or less, you won’t have to report the income, but you also can’t take any deductions.

• Room Exemptions: The same 14 day rule applies to those renting out a single room or an entire property. Be sure to account for the rules set forth by the IRS, as they apply to whether you are renting out an entire property or just a single room. Savvy investors, however, could use this to their advantage.

• Maintain Pristine Records: The best real estate investors know how important it is to keep flawless records, and vacation rental property owners are no exception. As an investor with a vacation home, make sure you are keeping organize records of everything that goes on in your property. You will find it’s a lot easier to deal with tax time when your records are filed away as if they were a business. There is no excuse for losing or filing records improperly, so stay on top of them all year round.

• Document Everything: Any investor who knows anything about tax season knows that its on them to prove their claims. Every claim you make come tax time should be confirmed with the proper documentation. Therefore, be sure to document every expense you incur running your property, regardless if you’ll need it later or not. It is better to have all the documentation you need than just some.

Rental taxation rules haven’t develop much of a fun reputation, and for good reason. However, rental property taxation can ultimately turn out to be one of an investor’s greatest allies. There is absolutely no reason today’s vacation rental property owners can’t look forward to tax time each and every year, but I digress. While the tax rules for rental property can work to your advantage, you need to see that they do; nobody is going to do it for you. Mind due diligence and, above all, familiarize yourself with the appropriate rules. With any luck, you’ll find that you too may even like doing your taxes.

Key Takeaways