June 22, 2022

Buying property and selling after it’s appreciated is a wealth-building strategy that has been around for many years. It’s even better if that property can make you money through rental income.

A vacation home can be considered a personal residence or rental property, depending on its use throughout the year. If you’ve been considering allowing short-term vacation rental contracts for your properties or already allowing them, keep reading to learn what you need to know about taxes and vacation rentals.  

Classifying Your Home for Tax Purposes 

If you rent the home for more than 14-days in the year and personal use exceeds the greater of a) 14 days or b) 10 percent of the days the rent was at fair market value your vacation home is considered a personal residence.  Expenses get allocated against income with no deductible loss.

If you rent the home for more than 14 days in the year and personal use is no more than the greater of a) 14 days or b) 10% of the rental days during the year and the rent was at fair market value, you can classify the home as a rental property.  This can create a rental loss for tax purposes.

It is important to properly count the personal and rental days. Days spent substantially repairing or maintaining the vacation home are not considered personal use, but days family or friends rent the property at less than fair market rent are considered personal use.  

SPECIAL NOTE: A unique minimal rental use rule says if you rent your residence for fewer than 15 days, you don’t have to report the income and don’t deduct the rental expenses. You still get to treat mortgage interest (with limitations) and real estate taxes as personal deductions.

Steps to Take 

While owning a vacation rental property can be tricky to coordinate, it can benefit you in the long run, especially if you don’t have a property management company. Be prepared for tax season now by implementing the following: 

  • Track expenses by category and save receipts 
  • Record how many days the property is empty, is rented for fair market rent, is rented below fair market rent, and is used for personal use throughout the year.  

Reach out to the Friedman + Huey team today to discuss tax strategies for your vacation and rental properties so we can help you get the maximum tax and financial benefits.