E-Newsletter: Tax Law

Rental of a Vacation Home

Many individuals own a second home or condominium that they use as a vacation home for part of the year. Some people also choose to rent their vacation homes when they are not using them as a way to make some extra money. How are the rental income and any expenses related to the rental property treated for tax purposes? Generally, a taxpayer must include rent in his or her gross income. In addition, a taxpayer is generally entitled to deductions for expenses related to the rental of a vacation home. However, if a vacation home is rented for less than 15 days during the taxable year, the taxpayer is not allowed to take any deductions for the rental of the home and the rental income is not included in the taxpayer’s gross income.

Rent is Included in Gross Income

Section 61(a)(5) of the Internal Revenue Code (IRC) specifically includes “rents” in the definition of gross income. As such, any rent a taxpayer collects from renting out a vacation home is income that will be subject to the federal income tax.

Deductions Related to Vacation Homes

Under section 280A of the IRC, a taxpayer may be entitled to certain deductions related to the rental of a dwelling unit or vacation home that is also used as a residence. A dwelling unit can be a house, apartment, condominium, mobile home, boat or other similar property. Properties that are used exclusively as a motel, hotel or inn are not included in the definition of dwelling unit.

The rental expenses that a taxpayer can deduct depend on the amount of time that the vacation home is rented and the time that the taxpayer uses it as a residence. A dwelling unit is used as a residence if the taxpayer uses any part of it for personal reasons for the greater of 14 days or 10% of the number of days of the year during which it is rented for fair rental value. 26 U.S.C. §280A(d)(1). Under section 280A(d)(2), a day of personal use is a day (or part of a day) that the dwelling unit is used for personal purposes by the taxpayer or any other person who has an interest in the unit; used by a family member of the taxpayer; used by any individual pursuant to an arrangement allowing the taxpayer to use some other dwelling unit (for any length of time and regardless of whether rent is charged); or used by any individual for less than fair rental value.

The fair rental value of the dwelling unit is determined by the circumstances at the time a rental agreement is entered. Any day that the unit is rented for fair rental value is a rental use, even if the taxpayer uses the unit for personal reasons on those days. However, if a taxpayer rents the unit for less than fair market value, to a family member or someone else, it is considered personal use by the taxpayer.

If a taxpayer uses a vacation home as a rental property and as a personal residence during the tax year, the expenses must be divided up between both uses. Generally, the taxpayer will divide up the time based on the ratio of days the unit is rented to the total number of days the unit is in use. In addition, if a taxpayer rents only a portion of the dwelling unit, he or she can deduct expenses attributable to that portion of the property. The taxpayer can use any reasonable method, including the percentage of total floor space, in determining the amount of expenses attributable to the rented portion of the property. For example, if the dwelling unit is 2000 square feet, and the taxpayer rents out rooms that cover 500 square feet for six months, then the taxpayer can deduct one-fourth (25%) of half of the year’s expenses for the dwelling unit.

Preparing for a Meeting with Your Tax Attorney

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Preparing for a Meeting with your Tax Attorney

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