Are you one of the lucky people who own a vacation home? With the current economy, you may find yourself strapped for cash. Consider renting your getaway spot for extra income. But don’t forget–that income may be taxable. Here’s a quick tax guide to help break down the details.

If you rent out your second home 14 days or less (in a calendar year) rental income is not reported and expenses are not deducted. Simply pocket the cash and be on your way. No forms, no fuss, no reporting!

However, if you do rent the property 15 days or more, be prepared to report the rental income and deduct your expenses. The National Association of Tax Professionals reminds us, “You may be able to deduct certain expenses on your tax return. Interest, taxes, casualty losses, maintenance, utilities, insurance, and depreciation will reduce the amount of rental income that is taxed.”

So, if you fall into the above category, you’ll fall in one of these two subcategories.

1. Your property is strictly an investment property, you never use it personally, then you’ll track the income and expenses like a business would. You will probably use computer software to help you track your finances. Report all rental related income and expenses on forms 1040 and Schedule E.

OR

2. You rent the property for more than 15 days AND you use it personally. Here you’ll use the same forms (1040 and Schedule E) but you’ll need to calculate personal use versus rental use. To determine the percentages, track your rental dates. This may be as simple as notes on your calendar. Perhaps a color coded “X” for rental days.

It gets a bit tricky for those of us who have mixed personal and rental use, so hang on! Let’s look at how the IRS defines your home for tax purposes. They call it a “dwelling unit” and it is considered your home if you use it more than 14 days, or more than 10% of the total days it is rented to other at a fair rental price. Fair rental price is determined based on similar rental rates for similar property around the same time period.

Additionally, it is possible to have more than one home for tax purposes. The IRS provides this example “For example, if you live in your main home for 11 months, your home is a dwelling unit used as a home. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a home unless you rent your vacation home to others at a fair rental value for 300 or more days during the year.”

To further define, the IRS considers a “day of personal use” for a dwelling unit to be any day it is used by:

  • You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home under a shared equity financing agreement;
  • A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price;
  • Anyone under an agreement that lets you use some other dwelling unit; or
  • Anyone at less than fair rental price.

With the above information, you should be able to determine the percentage of rental to personal use. Simply divide the number of days you used the property personally by 365. Multiply by 100 for the percent. Do the same for the rental use. Add the two figures together and verify your math is correct by coming up with 100%!

Use the rental percentage you just figured to calculate the portion of mixed use expenses you can deduct. For more information refer to IRS tax topic 415 and 527, or e-mail me for more information or specific advice.