Renting Out Your Property? Prep For Tax Traps

Vacation Rental property tax traps
There are many things to consider, including tax traps, when you decide to rent out your vacation property

 

There’s money to be made when renting out your property, but beware of tax traps. Depending on a number of factors, you could run afoul of the IRS. So make sure you keep any records associated with your rentals. Don’t overstay your own visits and determine if you may be eligible for the Master’s exemption.

One of the trigger points that can make your tax return a target for an audit is claiming losses on vacation property. The IRS is carefully focusing these days on people with second homes that are treated as vacation rental units and then used as a vacation spot for your family.

In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a "vacation home" is not limited to a house. Apartments, condominiums, mobile homes and boats are also considered vacation homes in the eyes of the IRS. Furthermore, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10 percent of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.

A Quick Example

Let's say you own a house in the mountains and rent it out during ski season, typically between mid-December and mid-April. You and your family also vacation at the house for one week in October and two weeks in August. The rest of the time the house is unused. The family uses the house for 21 days and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario, 85 percent of expenses such as mortgage interest, property taxes, maintenance, utilities and depreciation can be written off against the rental income on Schedule E. As for the remaining 15 percent of expenses, only the owner's mortgage interest and property taxes are deductible on Schedule A.

 

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About the author

Ray Nowicki

Raymond M Nowicki CPA is managing partner of Nowicki and Company, LLP, a firm with its headquarters in Buffalo, NY with a satellite in Manhattan. Nowicki is a nationally recognized speaker and trainer of CPAs on pension plan auditing, and quality improvement for CPA practices. His firm also audits 401K plans. Ray has helped Nowicki and Company, LLP grow to be one of the top 30 firms in Western New York. In recognition for service to small businesses, New York Governor George Pataki awarded him the Small Business Advocate of the Year Award in 2005. He serves most of the firm clients, especially in a number of specialized areas including estate planning and trusteeship, structuring new business ventures, strategic planning and workouts, and litigation support.

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