If you are thinking about renting out your vacation home for extra income (or conversely, using your rental property for personal use), here are some tax tips to keep in mind.
First and foremost, be aware that the number of days you (or family members and certain others) use your vacation home will be treated by the IRS as "personal use" which can adversely affect tax benefits. The IRS uses a fourteen-day-or-ten-percent test, meaning if you stay in the home more than 14 days or 10% of the total days it's rented in a calendar year (whichever is greater), the deductiblity of related expenses will be limited to the amount of rental income. This could result in a huge loss of tax benefits if for example, your total expenses greatly exceed total rental income in a particular year (net loss). You would be unable to offset this net loss against other qualified income. So.... make sure you don't lose what might be a significant tax benefit by simply losing track of the number of "personal use" days.
If you plan to use your vacation home often, there is a "less-than-fifteen" day exception you may want to keep in mind (and verify with your tax advisor). If you rent out your vacation home for less than 15 days during the taxable year, the income may be yours, tax-free and you don't have to report it on your return. Just be aware that any expenses related to the rental are nondeductible. If you itemize, you can still deduct qualified mortgage interest and real estate taxes on your vacation home.
Other tax rules, such as passive activity and capital gains reporting, can also impact the decision to rent out your vacation home. Be sure to check with your tax advisor to review your options under the tax rules.
If you are considering a vacation home, or investment income property here in the La Quinta CA area... be sure to give me a call or email. There are some very good deals right now, particularly in the "off season" summer months.
Larry Hansen, CPA, Broker / Owner
Calif Desert Realty