If you own a vacation home, there’s a good chance you use it primarily as a getaway for your family and friends. But if it’s located in an area that’s popular with tourists, don’t overlook an opportunity to earn extra tax-free income by renting it out.
As long as you rent your home for 14 days or less during the year, you’re not required to report rental income on your tax return. The exception applies no matter how much you charge for the 14-day stay. The rule also applies to your primary residence.
The Internal Revenue Service (IRS) provision allowing individuals to exclude short-term temporary income is known as the “Masters rule” because residents of Augusta, Ga., successfully lobbied for the exemption back in the 1970s so they could rent out their homes during the annual Augusta National Golf Club Masters tournament. In enacting the provision, the IRS said such temporary rentals didn’t represent regular business activity. The rise of Airbnb and other vacation rental services that allow owners of vacation homes to list their properties has made the tax break even more valuable.
If you don’t use your vacation home frequently, you may be interested in renting it out for more than two weeks. Be aware, though, that once you exceed the 14-day threshold, you must report rental income to the IRS.
The good news here is that you’ll also be eligible for a long list of deductions that will reduce your tax bill. Deductible expenses include your mortgage interest, utilities, housekeeping, repairs, and even towels and sheets.
However, if you spend more than 14 days a year at your vacation home, or more than 10 percent of the number of days the home is rented, the IRS considers the home a personal residence. In that case, you can only deduct expenses up to the amount of rental income you’ve received, and you can’t deduct losses. Personal days include days you or a family member is using the house, along with days you’ve donated use of the house—in a charity auction, for example—or rented it for less than the going rate for your area. Days spent on the property to fix it up don’t count.
As long as you limit your personal use to 14 days or 10 percent of the number of days it’s rented, the home is considered a business, and you can deduct all of the expenses. Depending on your income, you may also be able to deduct up to $25,000 in losses if your expenses exceed your income.
For that reason, any vacation-home owner who is thinking about renting it out should keep good records, not only of deductible expenses but also of the number of days you stay on the property in relation to the number of days the home is rented. If you plan to rent out your vacation home for more than 14 days, you may want to limit the amount of time you spend there so you can increase the amount of deductible expenses.
