Featured News 2012 Tax Rules to Know if you Rent out a Vacation Home

Tax Rules to Know if you Rent out a Vacation Home

If you have a beach-side condo or a cabin nestled in the mountains, chances are that you only spend weekends and holidays in this location. If you have a special house that is only meant for getaways and time off work, then you may want to think about renting it out for the rest of the year. By allowing other vacationers to stay in your home, you will be able to obtain a small side income. If you choose to embark on this venture, you will need to be aware of the tax laws that follow. Without a knowledge of tax rules for vacation home rentals, you could end up in a lot of trouble with the law.

One of the most important rules that applies to renting a vacation home is the 14-day or 10% Rule. This rule states that the owner of the property will receive tax benefits based on how many days that property is rented out. This is compared by looking at how much time the owner spends in the home versus how often renters are in the property. If a home is used exclusively for a family’s vacations, then the owner can deduct real estate taxes and interest on a home mortgage. The more often that the house is rented out, the higher the taxes on the property will probably be. Insurance, utilities, and maintenance cannot be written off. If the home is used for rental purposes for part of the year, then the owner will fall into one of three categories.

If the owner only rents out his or her property for 14 days or less per year, then he or she has no need to report the rental income. This is a part of the tax laws, which say that the house is still considered a personal residence if it is rented out 14 days or less. These homes simply fall under the second home tax laws, and the owner can deduct mortgage interest and property taxes on Schedule A. No costs have to be deducted as rental expenses. Sometimes people call these tax breaks a “Masters exemption.” Investopedia says that this is because homeowners that live close to the Augusta National Golf Club can make as much as $20,000 renting out their homes for the two weeks surrounding the national tournament. The best part is, these renters don’t need to report a dime.

The second category for rental home owners occurs when the person rents his or her property for more than 15 days and only uses it for personal vacation less than two weeks a year. This means that the property is considered a rental home, and the rental activities are considered business that needs to be reported. All rental income needs to be reported to the IRS, and the owner can deduct property taxes, utilities, depreciation, insurance premiums, fees paid to property managers, maintenance expenses, and mortgage interest. The amount of expenses that can be deducted is relative to the percentage of days that the vacation home was rented out. The owner needs to divide the amount of rental days by the number of days that the home was used in total. The percentage that is obtained is the amount that can be deducted for your costs. In addition to the rental expenses, you are permitted to deduct up to $25,000 each year in losses after calculating your adjusted gross income.

If you use the property for more than 14 days or more than 10 percent of the total time that the home was used in a year, then the IRS considers your property a personal residence. This means that rental losses can’t be deducted and rental expenses as well as mortgage interest and property taxes can be deducted. All of this to say, the 14-day cut-off can have a huge effect on your tax expenses associated with your rental home. You should always keep careful track of your amount of personal days in the rental facility versus the days that it was rented out. Thankfully, any days that you spend fixing, improving, or constructing on your property does not count as a residency day. Therefore, don’t count this on your paperwork, even if your family spent the day doing recreational activities. If you keep these tax laws in mind when organizing your rental property, it can help you to avoid debates with the IRS and other issues. Talk to a real estate attorney in your area today if you need more help to determine a rental property situation.

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