Those fortunate enough to own a vacation getaway typically use their property exclusively for themselves. Others rent out their vacation homes for short periods to offset expenses. With the popularity of home-sharing apps like Airbnb and VRBO, many people now rent out space in their own homes for short periods of time.
With spring vacations approaching, you may be thinking about how you can take advantage of the opportunity to make a little extra money. But when property is of “mixed use” (used personally and rented), special tax rules apply, so before putting your vacation home on the rental market, it’s important to know how it could affect your taxes.
Renting 14 days or less a year
The tax treatment of vacation home rental income will depend on how long the property was used personally versus rented in the tax year. In some cases, net income from very limited rental use isn’t reported. If you rent out your property for 14 days or less in the year, you don’t have to report that income (or associated expenses), which can result in a nice bonus for properties owned in prime vacation spots or during major local events. However, the 14-day rule only applies if you personally use the property for at least 14 days in the year.
Renting more than 14 days a year
So, how do your taxes change if you rent your property for more than two weeks? You'll definitely need to plan on reporting that income to the IRS, but how you report it will depend on a couple of factors. The big thing to consider is whether the rental activity is “passive,” or if you're providing your tenants with services similar to running a hotel. You may also have to pay self-employment tax in addition to income tax. The good news is that however you report it, you’ll be able to deduct expenses from the rental income. When preparing your return, expenses must be allocated between business and personal for mixed-use property.
Wondering about the best way to know how to handle these complicated “mixed use” property tax rules? Keep good records and turn to a professional. A tax preparer who can provide advice can work with you throughout the year to help you file the correct forms, take advantage of available business deductions, and avoid costly mistakes.
If you’re looking for a tax advisor, Padgett has a nationwide network of EAs and CPAs who are ready to help. When you work with a Padgett partner, you’ll find someone who understands your unique situation, so find an office near you today!
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