If you rent out a living space such as a vacation home (or even a boat or recreational vehicle), consider these items as you determine whether or not you can take advantage of the tax breaks:
• Know when you have to report income. If you rent out your home for 14 or fewer days during the year, you don't have to report the income. But it also means you can't deduct any other rental expenses, though you may be able to deduct mortgage interest and real estate taxes as itemized deductions.
• Understand "personal use." Your vacation home is considered a residence if you use it for personal purposes for more than 14 days, or 10 percent of the total days you rent it to others at a fair rental price.
• Figure out if you can offset rental income. If you use the property for more than 14 days or 10 percent of the number of days it's rented, the rules change. Your rental deductions (except for taxes and mortgage interest) are limited to the amount of your rental income.
For example, let's say you stayed in your vacation home 20 days last year. It was rented at fair market value for 190 days. In this example, your personal use exceeded the 10 percent limit (19 days). Your rental deductions are limited to the rental income you received.
The rules are complex, but a basic understanding of the rules and good recordkeeping will help you get the best tax breaks from your vacation home. Give us a call or shoot us an email if you would like more information.