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Filing Taxes for Vacation Rental Property

Posted August 21, 2020

Whether you do it yourself or through a company like Airbnb, renting out a vacation property can be a lucrative source of income or a great way to help offset housing expenses. However, before you let out your lake cottage or spare room, it’s important to be aware of the tax rules for these types of rentals.

Three vacation rental tax scenarios

In an article for Investopedia, financial writer Jean Folger notes three different tax scenarios that might apply to your vacation rental property. Each of these scenarios comes with different IRS rules for reporting income and claiming deductions.

In the first scenario, you’re renting out your vacation property for as many as 14 days per year. If you stay within this parameter, you aren’t required to report the income on your tax return. However, you also won’t be able to deduct any rental expenses. According to TurboTax, these rules also apply if you’re just renting out one room of your property for 14 days or less.

In the second scenario, you’re renting out your property for more than 15 days a year and use it personally for fewer than 14 days. If this is your situation, you’ll need to report income from your rental for tax purposes. You’ll also be allowed to deduct rental expenses and claim losses if these costs outweigh your income.

In the third scenario, you’re renting out your property for more than 14 days a year and use it personally for more than 14 days or more than 10 percent of the rental days. If this is the case, the property is considered your residence. You can deduct rental expenses, but they can’t exceed your rental income. You also won’t be able to claim losses. Per TurboTax, this also holds true if you’re renting out a room, but you’ll only be able to claim a proportional amount of certain deductions like property taxes and mortgage interest.

What about state and local taxes?

In some places, TurboTax notes, you may need to collect state or local occupancy taxes for short-term rentals. If you rent out your property through companies like Airbnb or HomeAway, they might collect taxes directly from your renters. However, it’s important to check with the relevant government agencies to see if it’s your responsibility to gather and submit any taxes yourself.

Vacation rental tax deductions

If you meet the requirements set forth by the IRS, you can deduct a wide range of rental expenses for your vacation property. These include property taxes, mortgage interest, insurance premiums, and utilities. You can also deduct expenses related to repairs, cleaning, and yard maintenance. However, Folger warns that you can’t just deduct the entire amount for these expenses. You’ll need to divide the number of rental days by the total number of days the property was used. For example, if the property was used for 50 total days and you rented it out for 30 of those days, you’d divide 30 by 50 to get 60 percent. That means you could deduct 60 percent of the rental expenses from your rental income.

Record keeping for your vacation rental

No matter how many days a year you’re renting out your vacation property, make sure you maintain detailed records on everything. TurboTax points out that it’s especially important to keep precise track of rental days vs. personal-use days. You should also make a note of all relevant expenses along the way so you’ll have a complete record of them when it’s time to file your taxes.

If you’re thinking about renting out your vacation property, consider consulting with one of our tax professionals so you’re aware of all the relevant rules and requirements. With expert assistance and careful record keeping, you’ll be well on your way to reaping tax advantages for your property.

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