Now that we’ve hit midsummer, if you own a vacation home that you both rent out and use personally, it’s a good time to review the potential tax consequences:
If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.
If you rent it out for 15 days or more: You must report the income and you will have to split your expenses between deductible rental expenses and nondeductible personal expenses. The expenses are split based on the ratio of the personal use days and the rental use days. You can deduct any mortgage interest and real estate taxes allocated to your personal use as an itemized deduction, subject to the mortgage interest limitations.
- Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the passive activity rules for real estate activities.
- Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years.
Look at the use of your vacation home year-to-date to project how it will be classified for tax purposes. By adjusting the number of days you rent it out and/or use it personally between now and year end might allow the home to be classified in a more beneficial way.
For assistance, please contact us. We’d be pleased to help. I can be reached at HZemel@BerdonLLP.com or contact your Berdon advisor.
Hal Zemel, a Tax Partner at Berdon LLP, New York Accountants, has nearly 25 years in public accounting and advises businesses in the manufacturing, distribution, advertising, and real estate sectors.