Are you planning to rent out your home this summer? You see, summertime is the time of the year when people usually want to rent out their property. But before you jump and do it, there are some tax issues that you need to be aware of.
Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
Here are some tax issues you need to be aware of when you rent out your primary or vacation home:
1. If you use your vacation home solely for personal use, then it’s treated like a second home and the mortgage interest, real estate taxes, points & private mortgage insurance (PMI) will be tax deductible.
2. Now if you decide to rent it out, it becomes a little bit tricky. Here are 3 tax scenarios that can play out once you start renting it out:
a. Tax-Free Income Property
The first one is called tax-free income property. If you rented the vacation home for 14 days or less during the year, you don’t have to report the income. You get tax-free income! You can generally deduct mortgage interest, real estate taxes, points & private mortgage insurance but you can’t deduct any other rental expenses.
b. Rental property
The second one is called rental property. If you use the vacation home personally for LESS than the greater of 14 days or 10% of the time the home is rented, all rental expenses are deductible.
Example: You stayed in your vacation home 18 days last year. It was rented at fair market value for 190 days. In this example, your personal use was less than the 10% limit (19 days). Therefore, your rental deductions are tax deductible.
c. “Expenses claimed limited to income” property
The third one is called “Expenses claimed limited to income” property. If you use the property personally for MORE than the greater of 14 days or 10% of the number of days it’s rented, the rules change. Your rental deductions are limited to the amount of your rental income. However, the personal-use portion of taxes and mortgage are still tax deductible on your return.
Example: You stayed in your vacation home 20 days last year. It was rented at fair market value for 190 days. In this example, your personal use exceeded the 10% limit (19 days). Therefore, your rental deductions are limited to the rental income you received.
TAX STRATEGY – If you rent your home to your business for 14 days or less, your business can deduct the payment as business expense. However, the rental income you received will be tax-free! Best of both worlds!
There you have it. Make sure you review and listen to this video blog to make sure you understand the tax issues before renting your property out. If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.