In general, revenue from renting a vacation house for 15 days or more has to be recorded on Schedule E, Supplemental Income and Loss, on your tax return. You should also be aware that the term “vacation home” does not always refer to a dwelling. The IRS considers apartments, condominiums, mobile homes, and boats to be vacation residences. The tax laws for rental income from second homes can be complicated, especially if you rent the house out for many months of the year while also living in it.
Minimal Rental Use
However, there is one simple stipulation: homeowners who rent out their house for 14 or fewer days per year can keep the rental revenue tax-free. In other words, if you live near a vacation spot such as the beach or mountains, you might be capable of earning some additional money by renting out your primary property when you go on vacation for two weeks or fewer. Although depreciation and upkeep can’t be deducted, you can deduct mortgage interest, property taxes, and casualty losses on Schedule A (1040), Itemized Deductions.
Dividing Expenses Between Rental and Personal Use
A vacation house is deemed a dwelling if personal use surpasses 14 days or if personal use surpasses 10% of total days rented to others (if that figure is larger). When you live in a vacation property while simultaneously renting it out to others, you must split your spending between rental and personal usage. You cannot deduct the part of your costs that exceed your rental revenue.
Imagine you have a beach property (your “second home”) that you rent out throughout the summer from mid-June to mid-September. You and your household also spend one week in October and two weeks in December at the home. The house is empty the rest of the time.
The family occupies the house for 21 days and rents it out for 121 days, for a cumulative 142 days of usage every year. In this case, 85 percent of expenditures including mortgage interest, property taxes, maintenance, utilities, and depreciation can be deducted from the rental revenue shown on Schedule E. Only the owner’s mortgage interest and property taxes are deductible on Schedule A for the remaining 15% of costs.
Tax Reform and Vacation Rentals
For tax years 2018-2025, the amount of interest a homeowner may deduct is restricted to mortgage loan amounts of $750,000 or less. If you own a second property, the total of the two mortgages may surpass the $750,000 limit.
If you don’t rent out your second property, you may be missing out on tax and mortgage interest deductions that reduce your taxable income. As a result, it is advisable to consider renting out your second property as a holiday rental since you will be able to deduct these costs, as well as maybe others such as Homeowners Association fees, maintenance charges, and utilities. Furthermore, you can continue to utilize the house for 14 days each year (or more if you remain for home upkeep activities) and deduct these expenditures. Even if you use it more than 14 days each year, you can deduct these expenditures in proportion to the number of days rented.
Net Investment Tax
If you earn rental income, you may be liable to the Net Investment Income Tax (NIIT), a 3.8 percent tax levied on individuals, estates, and trusts with net investment income over certain thresholds.
Tax laws are intricate. Please contact us if you have any queries concerning renting out your second house or any other tax issues.