Tax Strategies for Vacation Rentals

Tax Strategies for Vacation Rentals

The concept sounds simple enough. You want to start renting out your vacation  home, to make some extra money. Before you go down that path, you might want to consider some of the pro’s and con’s of the tax implications.  So, let’s take a home to consider some of the tax strategies for vacation rentals.

Your primary living domain grants you a host of deductions.  An example of that would be the deduction you can get for the interest on the mortgage for your primary residence. What you may not realize is that the IRS allows for mortgage interest deduction on a second home as well.  If your second home is used strictly as a rental, and you don’t use it at all, there is a different series of deductions you can claim, such a maintenance and management fees.

The normal scenario, however, is to have a vacation home that is used some, and rented out on the weeks you don’t want it.  The IRS anticipates that the typical vacation rental home owner will rent the property at least some of the time.  The extent of this type of rental might just be limited to renting to family,  friends, or co-workers. If this type of rental arrangement is minimal, you can still consider your vacation rental home a personal retreat and/or second home.

To determine whether your rental qualifies as a second home, use this formula:  Add up the total number of days  that you and renters have used the property. If  you use the home 15 or more days a year, or more than 10 percent of the days you rent it out, then it can be considered a second home. If you can’t meet this rule, then your home has now entered the realm of investment property.

So, if you’re doing the math, you can rent your property out 14 days a year without having to pay taxes on the income. If your second home is in a vacation hot spot, this could be a nice chunk of money. If you rent more than that, then you will have to claim the income, and make use of any deductions offered to you. Examples of those types of deductions would include advertising, cleaning, maintenance, repairs, etc.

One thing to remember is that you must actually go and use the second home as a retreat.  If you are going down to do “work days,” you cannot count those days toward your total. You must be using your property for recreational purposes.  If you find all this hard to remember, then keep a diary of your visits to the vacation home. This will also give you some backing, in case you were to be audited by the IRS.

If you are going to use your second home as an investment property, in order to make use of the deductions available, depreciation costs, profits, losses, etc., then you will definitely want an accountant to help. You will also need to have a solid system in place to track income and expenses. You may also want to have a separate checking account for the business. This keeps the IRS from wanting to take a look at your personal accounts.

It is also possible to declare a loss on the rental of a vacation home. There are some very specific rules in place, that will require some professional help. There are also possibilities for taking tax breaks on the sale of vacation rental property, that result in a net loss. Just make sure you get an appraisal on the property, to help support your cause.

Federal and state income taxes not withstanding, you may also need to pay sales tax on the rental of your property.  Some states have a “casual use” rule, which may let you avoid having to pay sales tax for a couple of days of rental. However, you will need to consider paying sales taxes after that point. Take the time to register with your state’s Dept. of Revenue, and make payments on sales tax due in the proper periods.  Again, you will want to consult with a tax professional.

With a little planning, you can turn your second home into a profitable vacation rental home. Make sure you get a professional to help you understand all the tax strategies for vacation rental homes, and you’ll be on your way.

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