Income taxes can be a complicated issue for vacation rentals. Before we get into the details, it is important to note that most vacation rentals do not have taxable income. Renting a property on a short-term basis, for most owners, is intended to offset the mortgage costs or other costs of ownership. Even if you are ‘cash flow’ break-even or ‘cash flow’ positive you may deduct depreciation expense that can put you in a loss position for income taxes. So for most people there is no income tax owed on their vacation rental, but IRS rules typically limit or eliminate the amount of losses and deductions you can use to offset your other income sources, such as wages and investments.
As a general rule, for income tax purposes you will be required to report rental income from your vacation rental but you can also deduct your expenses, such as mortgage interest, real estate taxes, cleaning/maintenance, insurance, utilities and more. However, special rules govern the amount of expenses you can deduct. These rules are based on how much you rent the home versus home much you use it personally.
Below is a summary of the basic rules that will cover most vacation rental situations:
|Days Used Personally:||30||25% of expenses are personal|
|Days Rented:||90||75% of expenses can be used to reduce rental income|
|Total Days Utilized:||120|
In all of these scenarios your rental income and expense will be reported on Schedule E of your personal 1040 return. Any amount that are you are allowed to deduct for personal use of the property will be reported as a standard deduction on Schedule A of your 1040. Also, if you have a ‘single member’ LLC this activity will also be reported on Schedule E of your personal Form 1040, versus filing a separate tax return for your LLC.
Renting a property in most states is a business activity and will trigger the requirement to file a state income tax return in the state where your rental is located. The income and loss related to your rental property should be reported in the state where the property is located and not the state where you reside.
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