What is a “Vacation home”?
Renting out a property comes with a multitude of administration issue including the daunting tax reporting burden. As with everything related to US tax, there are layers of complication to the standard IRS forms and schedules. For rental income purposes, the IRS have different tax and reporting requirements depending on how a property is used.
The vacation home rules apply to part-time rentals that are still used personally by a taxpayer. The rules are designed to stop taxpayers from claiming deductions against second homes that would normally be available to business properties.
A property that is rented out can be classified in one of three categories for US tax purposes:
- Personal Residence (minimal rental use)
A property is classified as a personal residence if it is:
- Used personally for more than 14 days, and
- Rented out for less than 15 days
Tax Impact: The income from renting out the property is not taxable. The income is not reported on a US tax return and expenses related to the home are deductible on Schedule A per normal rules. For those living outside of the US, they should consider their local income tax obligations about reporting the rental income.
Example: Mr & Mrs A own a second home and spend 6 months of the year living at the property. For 10 days in the summer, they rent out the property to another family. This is a personal residence and the income received is not taxable or reportable.
- Rental Property (mostly rented)
A property is considered a rental if it is:
- Used personally for less than 14 days or 10% of the total rental days
- Rented out for more than 14 days
Tax Impact: The rental income and expenses are reported on Schedule E. Expenses related to any personal use days are not deductible. It is possible to generate a loss if the expenses are greater than the income. Generally, losses from a rental activity can only be deducted against other rental activities in the current year or carried forward to future years (see Passive Activity Loss rules).
Example: Mr B has a property on the coast that he uses personally for 10 days every summer. For the remainder of the year, it is let to various tenants. This is a rental property, and the income received must be reported on Schedule E. The running costs of the property are apportioned to 355 days of the year and deducted against the income.
- Vacation home (Personal & Rental)
A taxpayer will have a Vacation Home if it is:
- Used personally for more than 14 days or 10% of the total rental days (if greater)
- Rented out for more than 14 days
Tax Impact: The income is reported on Schedule E and expenses are limited to rental use days only. The expenses cannot create a loss, but unused expenses can be carried forward.
Example: Mrs C has a second home that she uses personally for 6 months of the year and rents out for the other 6 months. This is a vacation home. 50% of the running costs of the property can be applied to Schedule E but limited to income received.
This article does not constitute as tax advice. If you would like to discuss this in more detail, please get in touch.