Can renting a vacation property be financially beneficial? Whether it be an entire house, room in a house, condominium or mobile home, the goal is to gain some extra spending cash or help pay off some of the expenses associated with owning the property. There are certain tax provisions that are beneficial to a vacation home owner that would make this goal even more attainable. If certain criteria are met, the renting of a vacation home can be completely tax neutral.
One term to be aware of is what the IRS deems a short-term rental. For any property that is rented fewer than 14 days of the year, it is deemed to be a short-term rental and the income generated is tax free. Since the income is tax free, the taxpayer is not required to report any of the income received, but in turn, none of the expenses associated with the renting of the property are deductible. If planned properly, using a vacation home as a short term rental can help with cash flow.
On the flip side, if a vacation property is rented for more than 14 days in any given tax year, the income generated is no longer tax-free and must be reported. The expenses incurred from renting a vacation property and other indirect expenses will be at least partially deductible. There are many expenses that are eligible as deductible expenses, for example:
- Real estate taxes
- Mortgage interest
- Homeowner’s insurance
- Legal and professional fees
- Cleaning and maintenance
- Repairs
- Utilities
- Advertising and commissions
- Travel related to the care and upkeep of the property
- Depreciation
It is important to remember a vacation homeowner can only deduct indirect expenses in proportion to the rental days. For example, if a vacation home was rented for 55 days out of a 365-day tax year, only 15 percent of the allocable expenses will be deductible. The percentage of deductibility is the total rental days over the total days owned. Once a vacation home is rented for more than 14 days, the IRS rules get more complex. It is important to know that these rules exist so that proper tax planning can be done. With regards to the Tax Cuts & Jobs Act of 2017, if a property is qualified as personal, it is disqualified from receiving any benefit and deduction from the Section 199A qualified business income deduction.
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For more information on this topic, please contact a member of Withum’s Real Estate Services Team.
