Many of us dream of owning a second home, but a second property can be much more than your vacation destination. In addition to a getaway for your own use, renting out your second home is a great way to offset its expense and earn extra income. But just like other types of income, the IRS expects its share of tax if your property and its use fits their definition of a “vacation rental home.” Here are some ways to determine whether your second home qualifies as a vacation rental, what needs to be reported, and what you can deduct.
What Qualifies as a Vacation Rental?
Vacation homes are unique because they’re somewhere in between a rental and a personal use property. Since they’re so different, the IRS has defined several special rules for the income you earn from a vacation home, as well as what type of property qualifies as a vacation home. The property doesn’t have to fit the strict definition of a ‘home,’ since the IRS classifies a vacation home as anything that has a sleeping place, toilet, and cooking facilities. If you rent any kind of property that fits their description, from a home to a houseboat to an RV, the IRS will tax the income you earn.
What Gets Reported and Deducted?
The rules around how a second property is used are more complicated. According to the IRS, the amount of time that your property is used for personal use will determine whether you need to report the income and what expenses you can deduct. Here are the general guidelines:
- If you rent your second home for more than 14 days, all of the income is reportable. If it’s rented for 14 days or less, you are not required to report the income.
- If you rent the property for any amount of time, you need to record your rental expenses.
- If your home is used for your personal use for 14 days or less, or less than 10% of the time you rent it, all of the rental expenses are deductible.
- If the property is used for personal use for more than 14 days or 10% of the time it’s rented, your rental deductions are limited to the amount of the rental income. However, your deductions for the mortgage and taxes don’t count towards that total.
Renting your second property can be lucrative, but don’t forget that you’ll still likely need to report the income you earn from renting your property on your taxes. We can guide you through the rules and ensure that you’re getting the best tax breaks and deductions. If you have questions about renting your second home, please don’t hesitate to contact Cray Kaiser at 630-953-4900.