Do you own a vacation rental? Do you use a rental agent or online rental service? Do you rent out a first or second home for extra income? Websites, such as Airbnb, VRBO and HomeAway match property owners with prospective renters; however, there are some special tax rules may apply to you.
What Tax Rules Apply to my Vacation Rental?
These special, and sometimes complex, tax rules can make the rents that you charge tax-free. Keep in mind there are other situations that may force your rental income and expenses to be treated as a business. If that is the case, your vacation rental income and expenses will be reported on a Schedule C, as opposed to a rental activity reported on Schedule E.
A Synopsis of the Tax Rules Governing Short-Term Rentals.
I Rent My Property for Fewer than 15 Days During the Year
When a property is rented for fewer than 15 days during the tax year, the rental income does not need to be reported. However, the expenses associated with that rental are not deductible either. Interest and property taxes are not prorated. Also, the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions. This is normal on the taxpayer’s Schedule A.
The 7-Day and 30-Day Rules
Rentals are generally passive activities. However, an activity is not treated as a rental if either of the following applies:
- The average customer use of the property is for 7 days or fewer—or for 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services.
- The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use.
If the activity is not treated as a rental, then it will be treated as a trade or business. This means the income and expenses, including prorated interest and taxes, will be reported on Schedule C. IRS Publication 527 states:
“If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.”
Substantial services do not include the furnishing of heat and light, the cleaning of public areas, the collecting of trash, and such.
Exception to the 30-Day Rule
Personal services are neither significant nor extraordinary for the purposes of the 30-day rule if these two scenarios take place:
- The personal services provided are close to being the same to those generally provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection),
- The rental includes maid and linen services that cost less than 10% of the rental fee.
Oh, life’s privileges!
Profits & Losses on Schedule C for Your Vacation Rental
Profit from a rental activity is not subject to self-employment tax. However, a profitable rental activity that is reported as a business on Schedule C is subject to this tax. What does this mean? A loss from this type of activity is still treated as a passive-activity loss unless the taxpayer meets the material participation test. What is that? Generally, it is when the property owner provides 500 or more hours of personal services during the year or qualifying as a real estate professional. Losses from passive activities are deductible, but only up to the passive income amount. Unused losses can be carried forward to future years. Just like roll-over minutes on a cell phone plan.
Are there special allowances for real estate rental activities?
The answer is yes. As long as there is an active participation permits. Then a loss against nonpassive income of up to $25,000 may apply. This phases out when modified adjusted gross income is between $100K and $150K. However, this allowance does NOT apply when the activity is reported on Schedule C.
Get Your Reporting on the Schedules Right
These rules can be complicated. There is no doubt about it. Please feel free call this Alex Franch, BS EA at 781.849.7200. Alex can schedule an appointment and help you get to determine how vacation rental rules apply to your particular circumstances. He will also advise you on what actions you can take to minimize tax liability and maximize tax benefits from your vacation rental or any rental activities.