Have you ever contemplated purchasing a second home? Have you wondered about renting out the home to cover some of the costs? Consider how the following pros and cons will affect your tax situation.
Usually, when you own a second home, the only expenses that are deductible are mortgage interest and property taxes which are deducted on Schedule A of your Form 1040. One of the perks to renting out your second home is that you have the opportunity to deduct expenses that normally would not be deductible, such as utilities, homeowners insurance, and minor repairs (i.e., painting, replacing a small appliance such as a microwave, etc.).
However, to benefit from the additional costs, you must pay close attention to the personal-use days of the home. In order for a second residence to be considered a rental property, making the usually non-deductible tax deductible, the home must be rented for more than 14 days (at fair rental value) and personal use can be no more than 14 days or 10 percent of the number of days the home is rented, whichever is greater.
The fair rental value will vary depending upon the location and condition of the dwelling. Refer to the U.S. Department of Housing and Urban Development (HUD) Fair Market Rents Documentation System. This website can help you determine the fair rental value of your home.
The IRS deems personal use to be any day that the home is used by:
- You or any other person who has an interest in it, unless a fair rental price is charged
- A member of your family
- Anyone who is charged less than fair value rental
When the personal use days are restricted to the 14 days or less than 10 percent of total days rented, whichever is greater, the owner reports 100 percent of all expenses directly related to rental activity on Schedule E of Form 1040 along with a portion of expenses not directly related to the rental activity (i.e., property taxes, mortgage interest, etc.). As the owner, you also can depreciate the home, thus reducing the rental income even more. However, this could affect the treatment of any gain or loss on a future sale, so it is something that should be discussed with a tax professional before electing to do so.
Many aspects must be considered when thinking about renting your second home. It is always best to get advice from a tax professional before making final decisions. Please contact me if you would like additional information.