November 2018 JD Supra
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Do you own a second home or a vacation home that you rent out? was published by JD Supra on 11/30/18.

Rental income is reportable on a Taxpayer’s tax return. Certain expenses such as mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation may be deducted from a Taxpayer’s rental income from the use of a dwelling unit; all which will reduce the amount of rental income that’s subject to tax. There are different tax rules if a Taxpayer renting the property uses the property as a residence at any time during a tax year.   

What is a residential rental property?

Residential rental properties are known as “dwellings”.  They may include a single house, apartment, condominium, mobile home, vacation home or a similar property.  Taxpayers that are renting property can use more than one dwelling as a residence during the year.

When is a dwelling is considered a residence?

A dwelling is considered a residence if used for personal purposes during the tax year for more than the greater of 14 days or 10 percent of the total days rented to others at a fair rental value (this is also known as the personal use times test).

What if a dwelling is rented for fewer than 15 days?

If a dwelling is rented out for less than 15 days during a tax year, a Taxpayer does NOT have to report rental income and is NOT permitted to deduct rental expenses.  Nonetheless, the Taxpayer can deduct homeowner deductions such as mortgage interest, real estate taxes and casualty loses as itemized deductions on Form 1040, Schedule A of an individual tax return.  

What is personal use of a property?

Use of a property is considered personal if it is used by:

  • Any person who owns an interest in the property,
  • A family member of any person who owns an interest in the property (unless it’s the family member’s principal residence and the owner receives fair rental value),
  • Anyone who has an arrangement that permits the owner to use some other dwelling or
  • Anyone using the property at less than fair rental value.

What does rental income include?

  • Normal rent payments
  • Advance rent payments
  • Payments for canceling a lease
  • Expenses paid by the tenant

Taxpayers must divide their expenses between rental use and personal use

  • Taxpayers use Schedule E (Form 1040) to report income and expenses from rental real estate.  
  • Taxpayers may be able to deduct some of their personal expenses on Schedule A (Form 1040) if they itemize deductions.

How may Taxpayers divide property expenses between rental use and personal use?

  • Divide the expenses between rental use and personal use based on the number of days used for each purpose.
  • Any day that the unit is rented at a fair rental price is a day of rental use even if the Taxpayer used the unit for personal purposes that day.
  • Any day that the unit is available for rent but not actually rented is not a day of rental use.  

Rental real estate activities are known as passive activities – and there are limits

  • Can’t offset income, other than passive income, with losses from passive activities.
  • Can’t offset taxes on income, other than passive income, with credits resulting from passive activities.
  • Excess losses or credits are carried forward to the next tax year

Don’t be a victim of your own making

Taxpayers ought to understand vacation home rental rules by consulting with a specialized tax professional.