Renting Out a Home, Condo, or Vacation Home

You may be able to generate income by renting out your main home or a second home for part of the year. For instance, say you own a beachfront condo in Miami or a house on Cape Cod. If you’re willing to not use the home for a period of time during the season — a couple of weeks, a month or more — you may be able to collect enough rental income to offset your ownership costs throughout the year. The amount of rent depends, of course, on your location and your home-the more prime the location and the bigger the home, the more you can charge.

Before renting out your home, however, be sure to understand the tax impact this can have on you.

Rules for reporting rental income

If you rent out the home for fewer than 15 days during the year, you’ve discovered a tax loophole. In this case, you aren’t tax on the rent-you don’t even have to report it!

If you rent out the home for 15 days or more, all of the rental income is taxable. But you may be able to offset it by certain deductible expenses. How you figure what’s deductible and what’s not depends on the number of days you use the home during the year.

Limited personal use

If you don’t use the home too much (as you’ll learn shortly), then you are viewed as anyone else with rental property. You can deduct all applicable expenses, with these two limits:

• You must be able to show that you rent the home with the intention of making a profit. If you don’t then rental expenses can’t exceed rental income.
• You must navigate the very tricky and technical “passive loss rules.” Essentially, these rules bar current deductions in excess of income from passive activities (renting a home is a passive activity). However, even if you fall within these rules, you can deduct up to $25,000 in rental losses each year as long as your adjusted gross income (AGI) does not exceed $100,000; a partial deduction is allowed when AGI is between $100,000 and $150,000.

Personal use prevents full deductibility

Too much personal use creates substantial limitations on the amount of rental income you can deduct. What’s too much? It means that your personal use is more than 14 days during the year or 10% of the number of days the home is rented out at a fair rental, whichever is more. For instance, if you rent your home out for a month and live there the rest of the year, your personal use is too much. If you have a second home that you rent out for a home and you use the home for 3 weeks, you’ve also exceeded the 14-day/10% limit.

Personal use includes not only your own use, but use of the home by relatives and anyone else who pays less than a fair rental. It also includes use by anyone with reciprocal rights (e.g., you swap homes for a vacation).

Suppose you rent your ski chalet for one month during the ski season and use it for the rest of the season. Since your personal use is above the 14-day/10% limit, deductions related to the rental cannot exceed the rental income. The tax law dictates how you figure this limitation.

In any event, you’ll certainly be able to claim all of the deductions you would have had you not rented the home, such as mortgage interest and real estate taxes. The only this to determine is where to report the deductions-as an itemized deduction, which may be limited because of your income or for other reasons, or as a rental expense to offset rental income.