Posted by Tucker Accounting Services LLC

Tax Rules for Vacation Homes

Tax Rules for Vacation Homes

You might have a home where you stay for some time in a year while you rent it for the other part of the year. Doing this means you have to prorate the incurred expenses between rental and personal use. Vacation homes are treated this way, which makes it essential to follow similar rules. 


Homes Used by the Owner Most times

If the place is your significant home and the rental period is less than 15 days in a year, reporting the income is unnecessary. You, however, cannot deduct expenses that come with the rental although, you can claim homeowner deductions for things like:

  • Casualty losses

  • Mortgage interest

  • Real estate taxes


Homes Used by Tenant and Owner 

You will have to report rental income using Schedule E if you have a tenant who rents the home for 15 days or more. While you can deduct expenses, they must be prorated and might be limited.

You cannot deduct expenses above the rental income if the place is your residence. If it is not your residence, you can deduct costs above your rental income. There are, however, passive activity rules that will limit your income. 

For a home to be classified as a residence, the following tests must be passed:

  1. There must be necessary and essential living accommodations available. This means the presence of bathroom facilities, sleeping space, and cooking facilities. The residence can be any of the following:

  • Motor home

  • Mobile home

  • House

  • Houseboat

  • Apartment 


  1. The time test for personal use must be passed. For a home to be considered as a residence, you need to use it for personal use, which should be more than the following:

  • 14 days

  • 10% of the entire days in which you rent the home 


Personal use Time 

The time amount in which you used the home includes the use by

  • Anyone with an ownership interest in the house. However, this does not apply if another owner rents the home as their primary home using the agreement of shared equity financing

  • A family member of anyone with an ownership interest in the place. This is valid, except the family member uses the place as their primary home with a rental value payment. Family members can be sisters and brothers (including half brother or sisters), spouses, parents, children, grandkids, or grandparents. 

  • Anyone whose payment to use the home is not up to the fair rental value. This does not bind an employee who uses the place as lodging with the employer's consent.

  • Anyone using the home in a home exchange arrangement with the house owner. It can be paid or rent-free; it does not count. 

A tenant that pays the fair value of rentals could give permission to the owner to stay. When this happens, the time is personal use in deciding whether the place is a residence. In estimating the prorating expense ratio, the time is considered as rental use

.

  • The time you had to go to the house to repair and maintain it does not factor in the personal use time.


Rental use Time

It is essential to count the rental use days to help estimate the prorate expense ratio. The rental use is classified as any day the dwelling is rented at the rental value. As a result, in figuring out the ratio, one can only account for the days in which rent payment was paid.


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