Vacation Rental Tax Concerns
Many people who own vacation homes love the idea of being able to rent out the property when they are not using it. You can use many different types of property as a vacation home including boats, mobile homes, condos, apartments, and houses. When you own property that you rent out to others, you will usually have to report the rental income on your federal income tax return.
However, there are quite a few things you need to consider when it comes to your rental home's taxes.
Your Vacation Time
You probably bought a vacation rental in the Outer Banks because you would like to spend a bit of time each year enjoying the area. However, if you are going to be renting out the property, and you want the home to be considered as an investment property rather than a personal vacation home, you need to make sure that you keep your personal use of the property to two weeks or less each year, or no more than 10% of the time that it is rented out at a fair market rate.
Of course, you could stay at the property longer than those two weeks if you wish. However, you will not be able to deduct all the expenses, which means you will not be getting as many tax advantages. This is because the property is considered a home rather than a rental investment at that point. If it is considered a home by the IRS, you cannot have deductions that equal more than the amount of rent you receive.
When you keep your stays to a minimum, anything that you buy for the home becomes deductible, which can be far more favorable for your tax purposes.
One other thing to keep in mind is that business visits to your vacation rental do not count against those two weeks. If you are in the area and at the home doing some work on the property, for example, it doesn’t count as part of your 14 days. However, you will want to be able to prove that you are working on the home or that you are there for business.
Keep receipts, just in case they are needed.
Depreciation Deduction
Make sure that you are taking the depreciation deduction each year on your rental property. When you buy a property that you plan to use as a means of making income, you can deduct part of the purchase cost each year on your taxes. If you do not do this, you are simply leaving money on the table, which is always a terrible idea.
The Rental Rate
You may have some family that would like to stay in your vacation rental in the Outer Banks at some point. If that’s the case, you might be tempted to give them a reduced rental rate as a favor. However, this is a bad idea. If you reduce the rent to below the fair market value, the IRS will consider this as being a part of your vacation time, and it will come off those two weeks mentioned earlier. If you are going to rent to family and friends, you must charge the full rate. Let them know why you are charging the full amount for the rent, and they will generally be understanding.
Services
Here is something else that many people do not realize, and it may not apply to every owner, as it is for those who rent out their property in specific ways. If you rent out the property for 14 days or fewer each year, you do not have to pay taxes on the rental income that you make. This is true no matter how much money you are making at the time, even if it is in the tens of thousands of dollars. For example, some people may have a fantastic property that they would like to rent out for special events, and it could command a substantial amount. You will not even have to tell the IRS about this income.
However, if you hope to be able to use that tax benefit, you are not allowed to provide any “substantial services” that would compete with hotels, motels, or B&Bs. This means you cannot offer any types of amenities, such as providing breakfast, housekeeping, and the like. You can do nothing that provides amenities that are in any way, shape, or form like the hospitality industry. If you do, then you must pay taxes on the money you receive.
Make Sure You Avoid Tax Problems
No one wants to get in trouble with the IRS, but the rules and regulations surrounding vacation rental taxes can be complex. You need to make sure that you do your best to avoid having tax issues. The following tips can help.
First, make sure you try to keep up with the rules surrounding the tax laws for vacation homes, and make sure you are aware of any changes that occur to these rules. Always strive to keep the best records possible for rent, for when you stayed at the vacation home, and for the money you spend on every aspect of the home.
Always err on the side of caution when it comes to recordkeeping.
Of course, one of the most important things to do is to make sure you are working with a qualified tax professional that understands everything there is to know regarding taxes for vacation properties. Many times, a CPA does not know enough about these sorts of taxes, and you will want to find a true tax expert who can help.
As you can see, when you own a vacation property that you plan to use as a rental, you need to be extremely careful about your taxes. Know what you are getting into, know the rules and your rights, and always be sure to work with a professional when it comes to paying the taxes.
Be sure to ask those tax pros any questions you might have, as well, so you do not make any mistakes that could end up being costly.