Many taxpayers are using home rentals as a way of obtaining additional income. How the income is treated depends on whether or not the “host” completely vacates the residence to use it for rentals only or whether he uses the residence himself in-between or during the rental use.
If the host does not use the rented dwelling as a residence at all, it is considered a “true” rental and thus, all expenses are deductible for the year or part of the year that the property was used or held for rental purposes, subject to the passive activity loss rules.
If the taxpayer (host) uses the rented dwelling as a residence, the rental falls under the “vacation home rules” (IRC Section 280A). A taxpayer is considered using a rented dwelling as his residence for the taxable year if he or she uses the property for personal purposes for a number of days which exceeds the greater of:
- 14 days or
- 10% of the total days it was rented to others
If it meets the criteria above, it is considered a vacation home rental and as such, the rental deductions are limited to the amount of rental income and must be allocated accordingly. Any deductions that cannot be claimed may be carried forward to future years.
Of course, there are exceptions. If a taxpayer uses a rented dwelling as a residence during the tax year and rents the dwelling for 14 days or less, the taxpayer is not required to report the income. They may not claim any deductions related to the rental.
Determining whether your vacation home is a rental, a vacation home, or a mixed use is a tricky assignment. On top of that, allocating and portioning expenses such as property taxes, mortgage interest, depreciation, and utilities between the rental and personal residence can also be quite confusing.
No worries we are here to help! We can help you properly fill out your Schedule E Form and can assist you in tracking and documenting related rental expenses. We can provide you with tax planning and consultation on how to treat your dwelling units and make sure you meet the specific rental tax rules.