This past tax season we noticed an uptick in the number of clients who rented out their homes through websites such as airbnb and VRBO. Moreover, we saw a number of clients ask us how they would be taxed if they were to rent out their home on a short-term basis through one of these websites.
Believe it or not, if you rent the home for 14 days or less during a calendar year, the IRS allows 100% of the rental income received to be tax-free.
Here are the rules as spelled out in IRS Publication 527:
Used as a home but rented less than 15 days. If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity.
The rules divide rental properties into three buckets based on the number of days rented versus the number of days used personally as follows:
- Rented 14 days or less – Income is tax-free and not even reportable on your tax return.
- Used personally for no more than the greater of 14 days or 10% of the days rented – Property is considered a rental property only, and all the expenses incurred during the year associated with that home offset any rental income received on a Schedule E. Losses may or may not be deductible based on your income.
- Rented more than 14 days and used personally more than the greater of 14 days or 10% of days rented – Considered a “mixed use” property. Here the rules get confusing, but essentially you first deduct 100% of any direct expenses including advertising, commissions, supplies, and any other expense incurred specifically in connection with the rental. All other expenses are prorated based on the days rented versus days used personally. Losses you can claim on this home are limited. IRS Publication 527 explains these rules in detail.
When renting out your home for just a few weeks a year, please plan ahead to not rent out that home for more than 14 days. Once you hit 15 rental days, you’ll need to report that income on your tax return and also prorate your mortgage interest and real estate taxes between your rental activity and your personal use days; causing you to lose out on a portion of these valuable tax breaks.
Your tax return will also become much more complicated for the current year as well as future years due to how the mixed-use rental losses are carried over to subsequent years.
Stopping at 14 days, therefore, is probably more valuable than getting that 15th day of rental income.
Are you aware that if you rent your home for 14 days or less in a calendar year, 100% of the rent received is tax-free to you?
Let’s say you can rent out your home for $5k per week, and you rent the home out for only 2 weeks each year. In this example, you would put $10k of rental income into your pocket each year without owing a dime in federal income taxes. Now that’s great tax planning!
We’ve recorded an informative 3-minute presentation on how to generate tax-free income from your home each year available at: https://youtu.be/mErYBKqXYUg
Please view it, like it, and share it.