Short Term Rentals
Income received for the rental of your home, a room in your home, or a vacation home, must generally be reported on your federal income tax return. Related expenses may have to be divided between rental and personal use. However, if the property that you also use as a home is rented for only a short time each year, the rental income may be tax-free.
Rental Property Also Used as a Home
If you use a property (including a vacation home) for both rental and personal purposes, the tax treatment of the rental expenses and rental income depends on whether you are considered to be using the property as a home. If the property is used as a home and rented 15 days or more, the deduction for certain rental expenses is limited if you have a net loss from rental operations.
You use a property as a home during the tax year if you use it for personal purposes more than the greater of:
- 14 days, or
- 10% of the total days it is rented to others at a fair rental price.
Example: Andrea has a vacation cabin that she used for 17 days and rented for 160 days during the year. The cabin is considered used as a home because she used it for personal use more than 14 days.
Rental Property Not Used as a Home.
If the property is not used as a home, all rental income is taxable and expenses must be divided between the rental use and the personal use.
Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than fair rental price is also personal use.
Example: Emma and her neighbor are co-owners of a condominium at the beach. Last year, she rented the unit to vacationers whenever possible. The unit was not used as a main home by anyone. Emma’s neighbor used the unit for two weeks last year and Emma did not use it at all. Because the neighbor has an interest in the unit, both Emma and the neighbor are considered to have used the unit for personal purposes during those two weeks.
Example: Jill rented the guest bedroom in her home at a fair rental price during the local college’s homecoming, commencement, and football weekends (a total of 27 days). Jill’s sister-in-law stayed in the room, rent free, for the last three weeks (21 days) in July. Jill figured 10% of the total days rented to others at a fair rental price was 3 days. The room was used as a home because Jill used it for personal purposes for 21 days. That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days).
Limit on deductions.
If your rental expenses are more than your rental income, some or all of the excess expenses are suspended and cannot be used to offset income from other sources. Excess expenses are carried forward to the next year and will be subject to limits that apply for that year. This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year.
Please contact us if you have questions about the tax effects of a transaction or event in your life or business.