Clients who rent out vacation homes can generally write off qualified vacation home expenses. However, if their personal use exceeds the tax law limits, they can’t deduct an annual loss. This could affect the way they use their vacation home for the rest of 2021.
If you rent out the home part of the time, this might cause tax complications. Let’s start with the basic rules and dig in deeper from there.
Basic rules: Normally, rental income from a vacation home is taxable, but certain expenses like mortgage interest, property taxes, repairs, utilities, insurance, etc., may be deducted against the income. (Depending on your situation, mortgage interest and property taxes may otherwise be wholly or partially deductible on your personal return for a qualified residence, subject to other tax law limits.)
If your annual rental is for just two weeks or less, you don’t have to report any rental income to the IRS, nor do you deduct offsetting expenses. But things get a little trickier if you rent out the place for more than 14 days and still use it personally. In this case, you must pay tax on all of the rental income, while you can deduct only a portion of the expenses. Significantly, you must allocate costs between “business use” and “personal use” days. Each day the home is rented to someone at a fair rate counts as a business use day.
Example: You rent out the vacation home for 80 days in 2021, and you use it personally for 20 days. Accordingly, you can deduct 80 percent of the qualified rental expenses (see above), as well as the full cost of a rental agent or property manager. You are also entitled to a depreciation deduction based on the 80 percent figure. If these rental expenses exceed your rental income, you would be in line for a tax loss.
But here’s the catch: Because your vacation home is used personally for the greater of 14 days “or” 10 percent of the number of days it is rented out, you can’t deduct a loss on your return. Keeping this in mind, you might try to stay within the boundaries of the 14-day/10 percent rule.
Saving grace: Any day spent fixing up the place doesn’t count as a personal use day, even if the rest of the family tags along. For example, if you fix a broken screen door while your kids are playing at the beach, it’s still treated as a business use day.
For more information, please contact Jose Escalante with Southwest Accounting Solutions at 520-615-4794.
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