Your Second Home May Be a Vacation Generator

If you own a second home in a resort or vacation area, chances are you’ve at least considered renting it out for a little extra income. The economy is picking up a bit, meaning folks are traveling more, and that lends a little more credence to that plan. Now, add to that the idea that you might not have to report your rental income to the IRS, and you have a pretty sweet deal.

It all comes down to how much time you – and your renters – spend there.

Generally speaking, if you rent your vacation home, the income from that activity must be reported on your federal tax return. But if you only rent for a short period each year, you may not have to report it.

Income and deductible expenses from rentals are reported on Schedule E, Supplemental Income and Loss, whether that rental is a house, apartment, condo, mobile home, or even a boat. But the IRS has some ground rules in place to help you plan just how much you want to put your vacation home up for rent.

The Ground Rules

When you use a vacation home as your residence AND rent it out to others, you’ll have to divide the expenses between rental use and personal use, and rental expenses can’t exceed rental income. How to figure if the place qualifies as your residence? If you use the property as your residence for more than 14 days – or more than 10 percent of the total days it’s rented out (whichever is greater) – it qualifies as a residence in the eyes of the IRS.

The IRS gives the example of an owner who lives in a vacation home for 17 days, and rents it out for 160 days during the tax year. In that case, the property is considered a residence, so deductible rental expenses would be limited to the amount of rental income.

When Less is More

If you rent your vacation home for less than 15 days a year, you can put that money right in your pocket; no need to report any of the rental income. You can still report expenses such as qualified mortgage interest and property taxes on Schedule A, Itemized Deductions.

For more information, you can download IRS Publication 527 – Residential Rental Property (Including Rental of Vacation Homes) from www.irs.gov. It includes special rules about personal use of rental property, and how to report rental income and expenses.

All this can make your next summer vacation a lot more fun. The conga line forms on the right!