Many of us dream of owning a vacation house that we and our families can use to rest and relax. Since we unfortunately cannot be on vacation all the time, many people rent their vacation homes out for part of the year to help defray some of the financial costs. While all you may want to think about is relaxing at your new pad, there are tax considerations to prepare for prevent tax time from killing your new found zen!

This two part series will cover the following questions:

Part 1:

• Do I Have to Report Vacation Rental Income?
• What Information Should I Track?
• What days count as Personal Use Day?
• What days count as Rental Use Day?

Part 2:

• How much of each expense type can I deduct?

Do I Have to Report Vacation Rental Income?

In general, yes, you have to pick up the rental income along with corresponding expenses on your tax return. 

However, there is one very important exception – if you use the house as your residence (more than 14 days during the year) as well as rent the house out for less than 15 days a year, you do not have to pay tax on any of that rental income.   If this exception applies, any rental expenses you had such as cleaning, repairs, or commissions are not deductible.

As an example, in NY when the Travers Stakes (a very large horse race) comes to Saratoga Springs, some of the local residents rent out their houses for the week or two around the event to either spectators or horse racing teams for a very pretty penny (To the tune of $400-$500 per night). Over a 14 day period, that could be $5,600-$7000 of completely tax free money as long as they did not rent the house out any other days during the year.  They can go on a nice vacation and not be out a dime!   Talk about the best of both worlds!

What Information Should I Track?

1. Financial Activity: Since many will not be lucky enough to fall into the above scenario of paying no tax on their rental income, let’s get down to the normal taxable scenario.  To start, what are some things that you should be tracking on your vacation house?  You should be keeping invoices as well as summarizing (preferably in Excel or expense tracking software) pretty much everything you receive and spend on your property for both personal and rental use.  Common examples are listed below:

Rental Income Received
Advertising
Auto and travel expenses
Cleaning and maintenance
Commissions
Insurance
Legal and other professional fee
Management fees
Mortgage interest paid to banks, etc.
Repairs
Taxes
Utilities

2. Rent Use vs Personal Use Days: Now that you have all of your financial activity, the second category of information to track is the number of days of personal use vs the number of days that the house is rented.  This is important because it determines the % of your expenditures that you can deduct on your tax return vs the amount that is considered personal and therefore nondeductible.

What days count as Personal Use Day?

Unfortunately, as with most tax topics, something seemingly simple is not.  Below are what counts as a personal day as well as some nuances with each one.

Days you stay at the house.

An exception here is days that you, or someone in your family, spends a “substantial” part of the day doing repairs and maintenance. If at least one person does this, the day is not considered personal use for anyone who stayed there that day, regardless of if they were sitting by the pool sipping a margarita or helping you.  Essentially, if you come in late Friday night, work all day Saturday on the house and leave Sunday morning, none of those days count as personal days.  Regardless of what your spouse or anyone else with you is doing during that time.

Days that a family member/extended family stay at the house for vacation.  It does not matter if they pay rent for the days or the amount of rent that they pay.

If a family member is using the house as their main residence, aka it is where they live, then it counts as a day rented vs personal day. However if this was the case then the house likely isn’t your rental property as the family member would be living there presumably the entire year.

Days that the house is rented below fair rental value.

For example, you normally get $60 a night for that time of year but decide to charge $40, these count as personal night. This would most likely occur if you were renting to a friend. If there was a business purpose for renting it cheaper, for example, you only rent a few weeks out and the weather is projected to be bad so you drop the rents, then it would not consider those days to be rented below fair value. However, we would recommend that you maintain records to support the business purpose for the lower rate.

What days count as Rental Use Day?

In contrast, a rental day is any day that the house is rented out at the fair rental value as long as it does not trip the above rules. However, days that the vacation rental is held out for rent but not actually rented do not get counted at all. They are generally disregarded (But see the next blog in relation to real estate taxes and mortgage interest).

Hopefully after reading the blog you now have an idea of the types of items that need to be tracked in order to prepare your return accurately and quickly. Maintaining complete and well organized records supplemented by an excel schedule or expense tracking software will both improve tax return efficiency and improve the quality of responses to a potential examination. 

Now that you know what to track, the next step is to learn about how the aforementioned expenditures can be deducted on your tax return in Part 2 of this series.

By: Andrew Ziolo, CPA 

Would you like to discuss this topic further?  Contact us at info@kanefirm.com or 716-633-7022.