If you rent out your vacation home less than 14 days a year, the rental income is tax-free!
With the record low interest rate environment, expected hyper-inflation, and uncertain stock market, the well-heeled are increasingly turning to real estate as an investment that they can use and enjoy. Whether it's a high-rise condo, a resort property, or a modest home in small-town USA, renting your vacation home on a partial basis can help offset acquisition expenses and in some cases, reduce taxes on your ordinary income.
Renting out your home less than 14 days means it's still considered a personal residence and you can put the rental cash in your pocket, tax-free. Hello, resort area property owners!
If you rent out your second home more than 14 days a year, you must report ALL rental income. Your rental expenses are deducted according to the percentage of time the home was used as a rental property. For instance, if you used the home for your personal use for 30 days out of the year, and you rented it out for 100 days, divide the 100 days rented by 130 days (total days home was used). This results in 77% for rental use, so you would be able to deduct 77% of depreciation, mortgage interest, insurance premiums, utilities and repairs as rental expenses. Also, 100% of property management expenses would be deductible.
Another great advantage of real estate is the ability to deduct up to $25,000 in real estate losses against your rental income and ordinary income. If you're a Real Estate Professional, or Realtor, this cap is unlimited. However, to qualify for the passive activity loss, your AGI, or adjusted gross income would have to be below $100,000. In addition, the passive activity loss phases out progressively for those with incomes between $100,000 and $150,000 a year. Also, if you use the home for more than 14 days a year, or more than 10% of the total number of days it's rented - whichever is more, the $25,000 passive activity loss doesn't apply, as the home is then considered a personal residence.
If you know anyone looking to buy or sell a vacation home in Dallas - Fort Worth, I'd love to help. You can reach me at 214-690-9682.
Troy Corman is the founder of t2 Real Estate LLC, a Dallas real estate firm providing specialized knowledge with a hands-on approach. Specialties include residential real estate brokerage, land and acreage, and commercial real estate services. Contact us today at 214.827.1200 if you need to sell, buy or get your DFW property leased.