If you're thinking of buying a vacation home at the shore and renting it out, or perhaps using it yourself as well, there may be tax consequences you haven't considered. Here's what you need to know.
Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.
There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.
Known as the "Master's exemption", because it is used by homeowners, near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master's Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.
Tip:If you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation--as long as it's two weeks or less. And, although you can't take depreciation or deduct for maintenance, you can deduct mortgage interest and property taxes on Schedule A.
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.
Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10% 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.
Keith R. Huntzinger CPA CPP MST
516 W. Main Street
Mechanicsburg, PA 17055
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