19 Feb 2019
Tax Rules for Renting Out Your Vacation Home It seems like the new year of 2019 has only just arrived, but the American federal tax deadline of Monday, April 15, is barreling towards us like a speeding bullet. Tax time is often a delight to those who expect a nice refund, which may allow them to take a much needed vacation, buy those new appliances, put a down payment on a new in-ground swimming pool or finance that cool summer camp their children have been begging for. However, it’s an entirely different story for those who end up owing the IRS at the end of the year, and it can be challenging to pay a big tax bill that you may not have been expecting. Here at Exceptional Stays, we have learned a little something about the tax laws that surround the practice of renting out your vacation home, and you might just be able to save yourself some money at tax time once you’re armed with these helpful facts and tips.
These few facts are a good outline for understanding the tax laws that apply directly to those who choose to rent out their vacation homes.
Pay Attention to the 14-Day Tax Rule
While some homeowners may enjoy renting out their vacation home all year around, there are others who only offer their home as a rental when a special event such as a golf tournament, a big concert or a popular festival is about to be held in the area. This second group of people may fall under the popular 14-day tax rule, and that can save you money regardless of how much of a profit you make from your rental during those 14 days. Here’s how it works: If you rent out your property for no more than 14 days during the year, then you will not be required to pay any federal income taxes on any of the income that you earn from that short-term rental. It doesn’t have to be 14 days in a row either; just no more than a total of 14 days in any given year. You must also use the property for yourself during at least 14 days during the year to qualify for this excellent tax break, and you may not deduct expenses that directly relate to the rental period if you use this tax loophole. This includes such expenses as cleaning fees and rental agency fees.
Vacation Homes Rented Out for 15 Days or More
If you live in an area that hosts several desirable events or offers entire seasons that draw in a large number of tourists from all around the globe, then you may very well want to rent your vacation home out 15 days or more over the course of the year. You won’t be able to avoid reporting the rental income if you do rent out your vacation home for 15 days or more and utilize the home for your own personal use for less than 14 days a year, but you will be able to deduct several rental expenses because your rental property will be considered a business by the IRS. These are a few of the expenses in relation to the rental of your vacation home that you may be able to deduct in order to reduce your overall federal tax bill at the end of the year.
- Property taxes Insurance premiums Property manager fees Utility bills Mortgage interest Expenses related to maintenance Depreciation Cleaning fees
Keep in mind that the percentage of the above expenses that may be deducted is determined by the amount of time that the home was actually occupied by renters. For example, if the home was occupied for a total of 120 days during the year with 100 days being rental days, then you could deduct 83% of the total rental expenses. Please note that the tax laws change often, so it’s in your best interest to have your personal tax attorney prepare your taxes, or you may always contact the IRS for some helpful free advice. Beyond the rental expenses that have already been noted above, it may also be possible to deduct your yearly vacation home losses in the amount of no more than $25,000. This amount is determined by the adjusted gross income of the owner.
These tips will help you keep track of your vacation home rentals so that you don’t have any issues with the IRS at tax time.
Carefully Document Rental Periods
You’ll definitely need to note exact rental dates as well as those days that you used the residence for yourself. This will let you know if you’ve fallen within the 14-day rental tax rule or have rented for 15 days or more. Having this information available at the end of the year will make it easy for you to correctly divide the percentage of personal and business expenses as well as identify exactly what you need to report on your federal income taxes.
Record Each Business Expense
Little things add up, so be sure to record each expense that relates to your vacation home rental. Itemize your list, and this may include some things that you may not think of such as the welcome fruit basket or bottle of fine wine that you provide for the arrival of your guests, the new guest towels, the paint you used to brighten up the rooms for spring or the grill and outdoor patio furniture purchased for the use of those who rent your vacation home.
Be Prepared for a Letter From the IRS
You shouldn’t be surprised or panicked if you receive a letter from the IRS because you didn’t report your vacation home rental income under the 14-day tax rule. This letter doesn’t mean that you did anything wrong, and it usually happens because the law still requires some vacation rental companies to report the income that you received from short-term rentals. All you have to do is provide the IRS with the documents mentioned in the first tax tip listed above that proves you absolutely stayed within the 14-day tax rule, and the discrepancy will immediately be cleared up with no further problems.
Getting Started With Your Vacation Home Rental
Here at Exceptional Stays, we represent a wide selection of luxury rental properties within the USA and abroad. If you have a quality home that you would like to turn into an income property as a vacation rental, then please feel free to contact us to discuss the best way to get started. We currently represent vacation properties in Telluride, Colorado, as well as various areas in Morocco, Spain, Mexico, Switzerland and the Dominican Republic, and we’re always looking to add luxury properties that are situated in desirable areas of the world to offer to our large customer base.