#Middlebury #TaxTip
by Mark A. Burns
In prior columns, we covered turning your personal residence into a rental property and also situations where you might live in part of the house and rent out another part. This month, we will cover the situation where you buy a vacation home and use it for part of the year personally and then rent it out for other parts of the year.
One general IRS rule for all rental situations is that if the property is rented for no more than 14 days during a calendar year, then the rent income does not have to be reported on your tax return at all for that year. So this is an exception to the general rule that ALL income must be reported on your tax return. Of course, in this case, no rental deductions are allowed either.
The rest of this column assumes the property is rented for more than 14 days. The first step is that all rent income received is reported on Schedule E attached to your Form 1040.
Next, we will discuss the deductibility of various expenses. In general, most of the expenses need to be allocated based on the number of days the property is rented and the number of days it is used for personal use. And any days it is rented to family members at less than fair rental value are considered personal days.
1. Mortgage Interest and Real Estate taxes – Rental portion goes on Schedule E and the personal portion usually goes on Schedule A (assuming you itemize your deductions).
2. Expenses directly related to rental activities, such as Realtor commission and advertising costs – Fully deductible against the rent income on Schedule E.
3. Other expenses related to the property that would not normally be tax deductible except for the rental activity (e.g., maintenance and repairs, insurance, depreciation, certain travel expenses) – Must be allocated between rental and personal usage days. Rental portion goes on Schedule E and personal portion is not tax deductible. If the number of personal usage days is more than “the greater of 14 days or 10 percent of the rental days,” then the amount of these expenses allowed to be taken on Schedule E is limited to the amount of rent income less the other deductions listed above, i.e., this category of expense cannot be used to create a net rental loss. On the other hand, generally if personal usage is fewer than 14 days, then the “passive activity” limitations discussed in prior months come into play.
This discussion relates to current (June 2017) tax law. It is not known at this time if the “tax reform” discussions in Washington might change these rules.
The above is a very general summary of what can be a very complicated subject. Each person’s particular situation can be unique. Always consult a tax professional if you are uncertain about how tax matters might affect you.
READERS: Do you have a tax topic you would like Mark Burns to discuss in this column? If so, please send your column idea to Mark@DFSPC.biz.
Mark A. Burns, M.B.A., is a C.P.A. with Diversified Financial Solutions PC in Southbury. He can be reached at 203-264-3131 or Mark@DFSPC.biz.
