5/1/18 Update: Due to changes in the new tax law, as of the 2018 tax year, rental properties may be eligible for the 20% deduction on qualified pass-through income. For additional information and to see if you may qualify for this deduction, check out this article.
I want to rent out my beach house, what do I need to know?
This is a common question, especially during the summer, and the answer is relatively straight-forward (at least compared to other parts of the tax code). If you rent out your vacation home, there are a few things to consider before determining how to address this from a tax perspective:
- If you rented out your vacation home for fewer than 15 days and used the vacation house “as a home” (see definition below), there’s nothing to do! None of the rental income is taxable and none of the rental expenses are deductible.
- If you used the vacation property “as a home” during the year, the rental expenses that you can deduct are capped at the amount of rental income you earned from the property. In other words, if you used the property “as a home”, you can’t take a deductible tax loss. How do you know if you used it “as a home”? The rules specify that the property was used as a home if either:
- It was used for “personal use” for 14 days during the year
- It was used for “personal use” for at least 10% of the number of days for which it was rented out. For example, if you rented it out 90 days and used it for 9 days, you used it “as a home” during that year
- Note – “Personal Use” includes:
- Use by the owner
- Use by the owner’s family or friends
- Use by anyone paying less than a fair rental price
- If you did not use the rental property during the year (or at least used it for less than the number of days indicated above), you need to track all of your income and expenses, and you may even be able to take a deductible tax loss, depending on how high your other income is in the given year
Okay, I’m ready to rent it out, now what?
If you don’t meet an exception listed above, there are a few things to consider and keep track of:
- You will need to file a form called Schedule E with your tax return, which keeps track of your rental income and expenses (your accountant will take care of this for you).
- You will need to provide your accountant with a breakdown of the income and expenses incurred during the year. You should (at least) keep a spreadsheet detailing all transactions relevant to the property, and you may even want to consider using a light-weight bookkeeping software like Xero. Some of the expense categories you may be tracking can include things like utilities, repairs, maintenance, brokerage commissions, and property taxes.
- Keep track of your basis in the property, as this is what your depreciation expense will be based on, and it will also be important when you sell the property (for more information on tracking basis, check out our post on The Importance of Tracking Basis).
- If your property is generating profit, remember that income taxes are not being withheld on this income, and you may need to pay estimated taxes during the year in order to avoid incurring interest or penalties.
As far as tax topics go, there’s not that much to keeping your books in good order should you decide to rent out your vacation home, and depending on your rental and personal use of the home, you may not have to do anything at all. If you’re not sure if this applies to you or you have any questions, let us know! We can help keep your taxes and financial life running smoothly and efficiently!