By A.J. Gross, C.P.A., E.A.
Summer time is just around the corner! Are you thinking about renting out your summer cottage? It may be a good idea. You could earn a little income and get some tax breaks for renting your summer cottage.
You are allowed to deduct expenses such as mortgage interest and property taxes paid for your 2nd home as an expense on Schedule A. You can’t deduct other costs such as utilities or repairs for your 2nd home. However, if you rent out your vacation home during the year, you may be able to deduct these other costs.
The first step is to determine how many days the vacation home will be rented compared to the number of days you will use the home for personal use.
If you rent the home for less than 15 days, you don’t need to report the rental income. This means you can collect tax free rent. You will still be allowed to deduct mortgage interest and property taxes as a personal expense on Schedule A. However, you will not be allowed to deduct other costs such as utilities and repairs.
When the home is rented for more than 15 days, then you will need to count the number of days the home will be rented and the number of days the home will be used for personal use. All expenses related to the vacation home are split based on percentage of personal use to rental use. For example, the vacation home is rented for 21 days and used personally for 220 days. 21/220 = 9%. This means you may be allowed to deduct 9% of all expenses such as mortgage interest, property taxes, utilities, and repairs against rental income.
The expenses for the vacation home may be limited to rent earned if the vacation home is used personally for more than 14 days or 10% of the total days it is rented to others at a fair rental price. In the previous example, the vacation home is rented for 21 days and used personally for 220 days. The percentage of rental use compared to personal use is 9%. This means the deductible portion of the rental related expenses may be limited to the rent earned. Any expenses not allowed in the current year may be carried forward to the next year. This may be a good tax break for you because the rental expenses will offset the rental income earned.
For more detail on vacation home rentals, I highly recommend reading IRS Publication 527, Residential Rental Property.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.com or www.ALGTaxSolutions.com.
This was printed in the May 3, 2015 - May 16, 2015 edition.