Owning a second home provides an opportunity for fun getaways or investment income – and often both. Before tax time takes the enjoyment out of ownership, understand IRS rules for vacation homes and keep records accordingly. The rules are the same for houses, condominiums, mobile homes, boats, or anywhere, so long as, lodging is the purpose.
When to report or not report rental income
- Do not report income if you rent the property for less than 15 days in a calendar year.
- If you use the rental property as a home, then you can’t deduct rental expenses in excess of the rent you collect.
- Personal use of the property includes any use by your family, other property owners and their families, and anyone who pays less than a fair market rental price.
- Deduct mortgage interest, points for closing, commissions, rental payments, insurance, repairs, cleaning and maintenance, taxes, utilities, management, legal, or other professional fees, auto, travel, and local transportation expenses, advertising, and depreciation.
- Keep all records and divide the expenses between personal and rental use. The best way to do this is to keep records of number of days used for each – personal/family/less than market value rent and market value rent.
- Report expenses in the year that you pay for them. So if you get a bill in December 2015, and pay it in January 2016, report the expense for 2016.
- Vacation home rental is supplemental income and loss, and files on Schedule E of the annual tax return.
- The Net Investment Income Tax may apply if your modified adjusted gross income exceeds the statutory thresholds of: $250,000 married filing jointly; $125,000 married filing separately; $200,000 for single or head of household; $250,000 qualified widow(er) with a child. The Net Investment Income Tax is 3.8%.
If you have a vacation home, or are considering purchasing one, talk with a Salmon Sims Thomas tax advisor.