How to Avoid Income Tax on Home Rental
By George Rehn, CPA

The term "vacation home" means a dwelling unit, including a house, apartment, condominium, house trailer, boat, or similar property. If the property is rented for less than 15 days during the year, no rental income is taxable. Several taxpayers have received a windfall in income without the tax bite especially during the Olympics in Atlanta in 1996 and various sports tournaments when you can command a higher price. This should encourage people to rent their house for a brief time. I wonder if the IRS will be "snooping" in your bedroom to see how long you rent your house.

If the home is not used by the taxpayer for personal purposes for the greater of (a) more than 14 days during the tax year or (b) more than 10% of the number of days during the year for which the home is rented at a fair market value rental, vacation home rental rules will not apply. The deductibility of expenses still may be limited if the rental of the residence is not engaged in for profit.

A vacation home is deemed to have been used by the taxpayer for personal purposes if for any part of the day the home is used:

1. for personal purposes by the taxpayer, any other person who owns an interest in the home, or the relatives (spouses, brothers, sisters, ancestors, lineal descendants, and spouses of lineal descendants) of either;

2. by any individual who uses the home under a reciprocal arrangement, whether or not a rental is charged; and

3. by any other individual who uses the home unless a fair rental is charged.

If the property is rented to any of above individuals at a fair market value, it is not considered personal use by the taxpayer.

If the property is rented for more than two weeks during the tax year and it is used by the taxpayer for personal purposes for the greater of (a) more than 14 days or (b) more than 10% of the number of days during the year for which the home is rented, the rental deductions are limited. The rental deductions may not exceed the amount by which the gross income derived from such activity exceeds the deductions otherwise allowable for the property, such as interest, taxes, utilities, maintenance, insurance, etc.

To illustrate this point:

If the taxpayer rents out their home for 30 days and uses the home for personal purposes for 30 days, the gross rental income from the unit is $10,000 for the period. The taxpayer pays $6,000 of real property taxes and $28,000 of mortgage interest on the property for the year. The additional expenses for maintenance repair, insurance, and utilities total $9,000. Depreciation expense is $11,000.

The deduction for the other expenses of $9,000 is based on 50% (30 days rented divided by 60 total days used). The interest and taxes are based on the whole year (30 days rented divided by 365 days) or 8.22%.

Gross rental income:$10,000

Less:

Interest: -2,301

Property tax: 493

Remaining available income 7,206

Utilities,maintenance,etc.: -4,500

Depreciation: -2,706

Net Income:0

The depreciation expense would be $5,500 but is limited to $2,706, since a vacation home can’t produce a loss. Depreciation expense is calculated only after other operating expenses are deducted. The remaining real estate taxes of $5,507 and mortgage interest of $25,699 are deductible as an itemized deduction on Schedule A.

So go ahead and rent, but not to noisy people please. Any questions on this or any other matters call me at 583-0268, or stop in the Fire Island Professional Offices in Ocean Beach on Fridays.