Taxes And Rental Properties

If you are one of the many people who have decided to use their vacation home as a rental property as well, you know there are a lot of tax implications involved.

Depending on how many days a property is rented out during the year and how many days a homeowner uses the property, there are different tax deductions and ways to report the taxes.

Owning a home presents the opportunity of numerous tax benefits and deductions, and renting can too.

As you can see from these first two sentences, taxes can be very difficult to understand.

A November 15, 2006 article by Amy Gunderson of The New York Times, “Figuring the tax benefits of renting,” attempts to simplify the tax/rental conundrum.

“Morphing a vacation home into an income-generating rental property can mean taking on an extensive to-do list. But along with all the tasks that go into the general maintenance of the property, homeowners have one more thing to deal with: Uncle Sam.”

“The decision to turn a second home into a rental, whether for a few prime vacation weeks a year or for several months throughout the winter ski season, has several tax benefits (think writing off the cost of that new water heater) beyond the standard perks of deducting mortgage interest and property taxes. But do not start gathering Home Depot receipts yet. Qualifying for these additional tax benefits depends largely on income and, most important, on how often a property owner might use the home.”

Becoming a landlord can be a task in itself, but then figuring out how taxes work can be another big headache altogether. The author gives three types of situations that a homeowner may decide to implement in their renting/personal usage schedule.

First, there is the homeowner who uses the property primarily for their own usage and then rents it out for only a week a year. This is the easiest to figure out the taxes for. “If a vacation house is rented out for less than 15 days each year, the rental income does not have to be reported. While the house can still qualify for the mortgage interest, property tax deductions and write offs for casualty and theft losses, in this tax category, a property owner cannot deduct any other expenses associated with operating and maintaining the house.”

If the homeowner barely uses the property and then rents it out for the remainder of the year, the tax situation is much different.

“Since the property is rented out for 15 days or more, that rental income will have to be reported. But these homeowners are now qualified to deduct expenses associated with maintaining the house and marketing it to renters. Everything from utilities, cable television, commissions paid to a property manager and insurance may be deducted. The cost of basic home repairs, like fixing a broken window, may be deducted, and larger home improvements, anything that ‘extends the life of the house,’ said Greg Rosica, a partner at Ernst & Young, may also be depreciated over several years.”

Finally, homeowners who spend about half their time renting out the property, and the other half at the property, the rental income must be reported (due to the 15 day rule).  But they can also make tax deductions and if you spend six days there fixing up the home, those days don’t count as personal use.

The best bet for any homeowners who also rent is to keep accurate records of everything and hire a good tax advisor!