Many taxpayers rent out their first or second homes without considering tax consequences. Even if you rent out your property using rental agents or online rental services that match property owners with prospective renters (i.e. Airbnb, VRBO, HomeAway), it is still your responsibility to properly report the rental income and expenses on your tax return. You should be aware of some special tax rules for renting your home that probably apply to you.
If Your Home is Rented for Fewer than 15 Days During the Year
When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A.
The 7-Day and 30-Day Rules
Rentals are generally passive activities, which means that losses from these activities are generally only deductible up to the amount of gains from other passive activities. However, an activity is not treated as a rental if either of these statements applies:
- The average customer use of the property is for 7 days or fewer—or for 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services.
- The owner (or someone on the owner’s behalf) provides extraordinary personal services for your tenant’s convenience such as regular cleaning, changing linen, or maid service without regard to the property’s average period of customer use.
If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated mortgage interest and real property taxes, will be reported on Schedule C.
Exception to the 30-Day Rule
If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.
The tax rules for renting your home can be complicated. Please call Cray Kaiser at 630-953-4900 to determine how they apply to your particular circumstances and what actions you can take to minimize tax liability and tax maximize benefits from your rental activities.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.