Tax season is here! While some of you might be looking forward to a big fat refund, others will be a bit concerned they haven't properly prepared. While consulting an accountant in your area is the best course of action to maximize your deductions, these tips will point you in the right direction:
1. What exactly counts as a vacation home?
A vacation home is anything that is in one place permanently (even if it is technically movable, like an RV) where you can prepare food, sleep and has a john. Most people think only a house or condo count as a vacation home, but technically, an RV, trailer, yurt or even yacht count towards a tax break.
2. Is my house a vacation rental or a personal residence?
This depends on how much you rent it out. If you only rent out your vacation home for 14 days or fewer per year, you don't have to report any rental income even if you are charging a million dollars per night. Mortgage interest and taxes are deducted as you would a primary residence and are considered a personal home.
If you rent your home out more than 14 days per year, it's a business and you have to report your rental income. In this instance you can deduct rental expense, but you need to be sure you allocate the costs properly between rental and personal use.
Now it gets fun… if you use the home more the 14 days or 10% of the time it's rented (whichever is the greatest), it is again a personal residence. You can't deduct losses but you can deduct rental expenses up to the point of the income.
If you are a person who rents out a room for less than 30 day increments, while you also live there (like many Airbnb-ers), you should talk to your accountant on how to best handle this in your state.
Assuming that you rent it out for more than 14 days per year at market rate, you will be able to deduct some of the improvement costs, among other things.
If this fits your situation, you won't take the interest deduction on a schedule A. Instead, you will fill out a schedule E to claim the rental income and property related expenses, which may include advertising, cleaning and maintenance, utilities, insurance and depreciation. Your expenses essentially reduce the income taxed.
It's also important to note that most vacation rentals are considered a passive activity by the IRS. This means only passive losses can offset passive income.
Think of the opposite scenario, you are considered an active participant if you are involved with the operations on the regular (you personally manage the business), in which case, you might be able to deduct $25,000 in expenses beyond the rental income. Of course, there are other IRS stipulations on this, pending you (and your spouses) income.
4. What about transient tax?
If you rent your home out for less than 30 days, you might have additional local taxes to pay, regardless if it's a personal residence or vacation rental. These are known as transient or your state's hotel lodging tax.
In many places, this is hard for municipals to track, but in others, there are sophisticated systems in place to monitor listings on VRBO, Airbnb and the like, to match with a local business licenses and subsequently transient taxes paid on said license!
I don't recommend, in any circumstance, to skirt this obligation. It would be a terrible guest experience for the authorities to knock on your door during their vacation for unpaid taxes.
And think of it this way, it really isn't an extra tax on your income. It passes through; charge it on top of your rental rate, put the amount into saving, and then pay quarterly/semiannually (as determined by your location). It's that easy.
These are just some tips I've picket up over the years, but as always, talk to your own accountant to discuss your situation and the details of any and all tax rules.
This guest post was written by Kris Getzie, Founder & Principal Consultant at Volo. She is a vacation rental expert and author of the recently published Vacation Rentals For Newbies.