Everyone loves the idea of owning a rental property. With markets such as AirBnB continuously growing, it is an enticing area for potential passive income. Many taxpayers opt to rent out their personal vacation homes, which is convenient, and a true “best of both worlds” option. However, there are some rules to know when deciding on whether to rent.
The most important rule for this vacation versus rental property differentiation is the amount of time used as one over the other. A residence must be rented for no less than 15 days to be considered a rental home. Furthermore, the residence must also be used personally for 14 days or less, or for 10% or less of the total time used.
Let’s look at an example. Henry owns an apartment near the beach, which he uses most weekends. He is going out of town for a week, and decides to rent out the apartment for some extra cash. He rents the apartment for 8 days. Since Henry does not rent the apartment for at least 15 days, it automatically does not qualify as a rental property.
Another example: Sarah owns a vacation home in the mountains. She uses the home for her own use for one week in July, and two weeks in November. She rents the home for the full months from January through May, and again from August to November. In total, the home is used for 231 days. Although Sarah personally uses the home for more than 15 days, her use does not exceed 10% of the total used time (21/231 = 9%). The house qualifies as a rental property, and is treated accordingly.
Once a property qualifies as a rental, expenses may be deducted from the gross income to arrive at a lower net rental income. If a property does not meet the rental requirements, you cannot deduct expenses. However, you also do not need to report any rental income collected!
There are a few extra rules to remember:
- Keep in mind that these rules only apply to US properties, not foreign property.
- All expenses must be appropriated between rental and personal use, including mortgage interest and real estate taxes.
- To be considered true rental days, all properties must be rented at fair market value. If they are rented below FMV, they do not count as rental days.
Happy renting!
