Everyone enjoys taking vacation and no one likes paying taxes. With services such as Airbnb increasing in popularity, earning rental income on a vacation home is becoming more convenient than ever. The tax issues surrounding vacation rentals are becoming more prevalent with taxpayers beginning to wonder if and how they are required to report income and expenses related to their vacation home. Continue reading to be in the know and take a vacation from the stress of surprises on tax day.
Vacation rentals offer a convenient form of income for many taxpayers, but how should the income and expenses on these rentals be reported on your tax returns? The owner reports this information on Schedule E of their personal income tax return. The net income (or loss, subject to limitations) at the bottom of this form is then included on the taxpayer’s form 1040, Individual Income Tax Return.
Since vacation rentals often benefit the owner, the IRS has prescribed specific rules regarding the allocation and reporting of income and expenses. How taxpayers must report this information is driven by two factors: the number of days the property was rented out and the number of days the property was used personally during the year.
Vacation rentals fall into one of three categories depending on the number of days the property was rented out versus used personally:
- Used personally for less than 15 days: The property is treated as a normal rental. No expenses must be allocated to personal use, and losses are subject to normal passive activity loss limitations.
- Rented for less than 15 days: The property is not treated as a rental and is not included on Schedule E of the tax return. No rental income or expenses are reported on the tax return. The owner may report property taxes and mortgage interest as itemized deductions on Schedule A.
- Used personally more than 15 days and rented more than 15 days: All rental income is reported on the tax return and expenses are deducted based on the ratio of rental to total days. In addition, no losses may be claimed on this category of vacation rental. Instead, all losses are carried forward to future years.
Personal use is not restricted to only the taxpayer and related parties. It also includes anyone who does not pay at least fair rental price for the usage of the property. As a result, it pays to be mindful of the local market rate rents before committing to any lease terms. It is natural to want to be generous with the renting of a second home, but doing so may result in a taxable shift.
Recently, in order to decrease the disturbance caused by a growing number of short-term vacation rentals, San Diego County has begun to impose a “Transient Occupancy Tax” on anyone renting any structure (or any portion of a structure) for less than one month at a time. To learn more, and to find out how this tax could affect you, visit: https://www.sandiego.gov/treasurer/taxesfees/tot/totfaq.
If the above applies to you, a strategy concerning the taxability of your vacation rental should be reviewed and considered as part of your personal tax strategy. If you have any questions regarding the taxability of income from your vacation rental, or any other tax matters, please contact your L&B professional at (858) 558-9200.