Buying property and selling after it’s appreciated is a wealth-building strategy that has been around for centuries. It’s even better if that property can make you money, say through rental income. If you’ve been considering allowing short-term vacation rental contracts for your properties, or if you’re already allowing them, keep reading. The following article will discuss what you need to know about taxes and vacation rentals.
Classifying your home for tax purposes
A vacation home can be considered a personal residence, depending on its use throughout the year. If you rent the home for more than 14-days each year and use it as a vacation home for your family for more than 14 days or 10 percent of the days you rent the home at fair market value (whichever is greater), the home is considered a personal residence.
If you use the home personally for less than 10 percent of the days, or fewer than 14-days during the year, or you rent it out for fair market value, the home can be classified as a rental property.
It is important that you properly count the personal and rental days. Days spent substantially repairing or maintaining the vacation home are not considered personal use but days the property is rented to family or friends at less than fair market value are considered personal use.
There is a special minimal rental use rule that says if you rent your residence for fewer than 15 days, you don’t have to report the income and you don’t deduct the rental expenses.
Steps to take
While owning a vacation rental property can be tricky to coordinate, especially if you don’t have a property management company, it can be beneficial to you in the long run. Be prepared for tax season now by implementing the following:
- Track expenses by category and save receipts
- Record how many days the property has sat empty, been rented for fair market value, been rented below fair market value, and was used for personal use throughout the year.
This will not only help you, but your tax advisor comes tax season next year. To discuss tax strategies for vacation and rental properties and for help establishing a system for tracking expenses and use days, reach out to our team of qualified experts today.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.