The following information if meant to serve as a guideline for vacation rental owners. We always recommend consulting a tax professional for help with your individual situation.
Q: I rent my vacation home for short-term rentals and live in it part of the year myself. How should I file my income taxes according to the tax rules for vacation homes?
A: The way your vacation home income taxes are treated depends on how much you live in the home and how much you rent it out. It's very important to keep detailed records of how many days you stay there yourself and how many days you rent it out. (You can also sign your own guestbook as a means of keeping track of your own visits.) Below is a summary of the different ways your vacation rental property might be treated when filing your income taxes.
- If you rent 14 days or less, according to IRS Pub 527, “…do not include the rent you receive in your income and do not deduct rental expenses.” So, if you decide to rent your home for a one-time event, for example, you will not have to include any of the rent in your total income, nor will you be able to file any of your rental expenses as deductions. (The interest on your mortgage could still be considered a regular itemized deduction.)
- If you rent for 15 days or more AND live in your home 14 days or less or no more than 10% of the total number of days it's rented out (whichever is greater), your tax treatment will depend on the length of time you're living there vs. renting it out. In other words, if you rent your home for 300 days a year, you can live there yourself for a maximum of 30 days. If you rent your home for 18 weeks, you can live there for up to 2 weeks.
- If you rent for 15 days or more AND live in your home 15 days or more or more than 10% of the total rental days, your vacation home is considered a residence. In this situation, your tax treatment will likely not be quite as favorable. You should still be able to take the same deductions and follow the same allocations, but if you have a loss, you may not be able to deduct the loss from any other income you may have. You can only deduct any loss on your vacation rental against any profit from the vacation rental. So, if you're losing money on your vacation home, this is not the most favorable tax situation, which is why it's important to adhere to the guidelines for the number of personal use days.
- If you rent the property for the entire year, it is treated like any other rental property. You would report your vacation rental income on Schedule E. You will be taxed on any profits, but in the event of a loss, you may also be able to deduct part of it depending on various factors.
A: No, when you visit your vacation home to handle maintenance tasks, the days you are working on those tasks do not count as personal use days. Be sure to keep detailed records of what you worked on and how long you spent on your various maintenance projects.
Q: What if I trade vacation homes with another homeowner? Does this affect the number of personal use days?
A: Yes, if you allow another vacation homeowner to stay in your home while you stay in his, this visit still counts against your own personal use days. The same is true for any type of barter when your vacation rental property is involved.
Q: What if I allow friends or relatives to use my vacation home for free or at a discounted rate?
A: If you claim your vacation rental property as an investment property on your income taxes and you rent your vacation home to a friend or relative for free or at a discounted rate, this could lead to trouble with the IRS. Plus, free stays or stays for less than fair market value for friends and relatives may count towards your own personal use days.
Q: What is the difference between sales tax and income tax?
A: If you rent your home on a short-term basis (the length of which will vary market to market), you are likely required to collect sales tax (also known as lodging tax, bed tax, occupancy tax, or TOT). Your sales tax rate is determined by the city, county or state, depending on your location, and should be filed to the city/county/state tax office monthly or quarterly rather than just once a year. This money does not come from your pocket; this is an amount above and beyond the rental rate for your guests, and you simply serve as the middleman. Your income tax, on the other hand, is determined by several factors, and any amount owed will come out of your pocket as the vacation rental owner.
Q: How do I handle sales tax when filing my income tax?
A: Sales tax should be included as an expense when filing your income taxes. Let's say you rented your property for $1000 and you are required to collect 10% sales tax. Therefore, your renters paid a total of $1100. When filing your taxes, you have to list your gross income, which in this case was $1100. Then, you would list the sales tax that you collected and then remitted ($100) on your Schedule E form, along with your other expenses. Make sure everything you reported to the city, county or state sales tax office coincides with your income tax return. http://www.irs.gov/pub/irs-pdf/p527.pdf
Q: What types of expenses at my vacation home are eligible for income tax deductions?
A: Income tax deductions depend on how often you personally use your second home, how many nights you rent out your home, and your adjusted gross income (AGI). In order for purchases or expenses to count as deductions, they must solely be used for your vacation rental business. For example, you cannot purchase a tool to use for one maintenance task at your vacation home and then bring it back to your primary residence and still claim it as a deduction.
Other items, such as cameras, cell phones or computers, can typically be claimed as deductions on a “percentage of use” basis. If you only use your computer for inquiries and bookings, you should be able to deduct 100% of the cost. However, if this computer also serves other purposes or is used by other members of your family, only a portion of the cost would be deductible.
Q: How does the Hobby Loss Rule apply to vacation rentals?
A: According to tax laws, deductions must be taken only from for-profit activities. Any other type of activity is considered a hobby. Therefore, if the IRS feels that you are not trying to earn an income from your vacation rental, you will not be allowed to deduct your expenses from this “hobby.” For example, if you make little income on your home but have lots of expenses, the IRS might assume that you are not trying to make your vacation rental a for-profit activity.
To make it clear that you are actively trying to profit from your vacation rental, you need to keep records of your advertisements, inquiries, bookings, etc. Even if your vacation rental business is suffering in a bad economy, you should keep a copy of all of your listings and document any email conversations with prospective renters (even if they chose not to rent) in order to prove that it is still a for-profit activity.
Q: How can I figure out my gross rental revenue?
A: Your gross rental revenue is different from your gross rental income. While your gross rental income represents everything you earned, gross rental revenue is equal to only the money collected and kept from renters. This could include your rental rate, cleaning fees, parking fees, amenities fees, pet fees, and any portion of the security deposit that you kept. Gross rental revenue does not include anything you did not keep, which could be refunded deposits or pet deposits or sales tax that was remitted to your sales tax office.
Q: Should I hire an accountant or tax expert to file income taxes for my vacation rental?
A: The income taxes for vacation rental properties can be a complex issue, especially if you own multiple properties. Hiring a tax expert can be highly beneficial, both for the time savings and potential cost savings. Just make sure that you hire someone that deals specifically with rental properties and is familiar with the rules and regulations. It is also possible for you to file your vacation rental taxes yourself, especially if you only have one property, but make sure you keep extremely detailed and organized records of your income and expenses.
The above is intended as a general guideline and should not be construed as tax advice. Be sure to consult your tax professional.
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