Published April 30, 2015

Taxed Out? Put Your Vacation Rental to Work for Next Year’s Tax Deductions

With summer approaching you may be counting the days until you, your family, or friends can escape to a vacation paradise. If you own real estate used for rental and vacation purposes or if you are considering making such a purchase, there are a few considerations you should be aware of that might impact your 2015 tax filing… and potentially result in tax deductions.

If you receive rental income for the use of a dwelling unit, you can deduct related expenses, subject to certain limitations. The limitations are determined by personal use of the property. If you rent a house or any other residential dwelling unit such as an apartment or condo solely to make a profit and do not use the property for personal use, then your deductible rental expenses will not be limited and may be more than your gross rental income. Your rental losses, however, generally will be limited to the “at-risk” rules and/or the passive activity loss rules. Deductible rental expenses may include expenses such as mortgage interest, real estate taxes, maintenance, utilities, insurance, and depreciation.

If you use a dwelling unit personally and also rent the home to others (i.e. vacation home), limitations may apply to your deductible rental expenses. Significant limitations could apply if you use the property for personal purposes during the tax year for more than the greater of:

  1. 14 days, or
  2. 10% of the total days you rent it to others at a fair rental price.

A day of personal use of a dwelling unit is any day that it is used by:

  • You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home under a shared equity financing agreement.
  • A member of your family or of a family of any person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price.
  • Anyone under an agreement that lets you use some other dwelling unit.
  • Anyone at less than fair rental price.

For example, if you use your beach house for 30 days, but also rent it to others at a fair rental price for 300 or more days during the year, your deductions will not be significantly limited. However, if the scenario changes slightly and you use the beach house for 30 days, but also allow your sister to use the beach house without paying the fair rental price for an additional 10 days, your deductions will be more limited, possibly to the total income received. In our scenario, allowing your sister to use the beach house for 10 days causes your personal use to increase to 40 days during the tax year, which is greater than 10% of the total days rented to others at a fair rental price. Certain types of rental expenses for a vacation home used for both rental and personal purposes could be limited by the personal use percentage of the total days occupied. However, any deductions not allowed could carry forward to future periods with the same income limitations.

If you use a dwelling unit as a personal residence and also rent it for fewer than 15 days during the tax year, you are not required to report any of the rental income or expenses related to the property on your tax return.

In summary, to maximize tax deductions, consider limiting your personal use of the property to 14 days or 10% of the total days you rent to others at a fair rental price. You may not be thinking about tax savings as you enjoy the summer sun, but we think it sweetens the experience to know you are making the most of potential tax deductions.

If you would like more information about vacation rental deductions or 2015 tax planning, contact the expert listed below at PYA, (800) 270-9629.

 

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