Tax Rules for Renting Your Vacation Home

For those in the Black Hills of South Dakota, the Sturgis Motorcycle Rally is fast approaching. That means the area’s highways and byways will soon be roaring. And for some residents, it means it’s time to rent out their vacation homes or second homes.

Depending on the length of those rentals, there could be tax implications. So let’s take a look at what the government says.

Your tax bill can depend largely on how many days you rent your property and your level of “personal use.” Personal includes how many days your relatives use your vacation home, even if you charge them rent that is less than “market rate.” Personal use also includes how many days those not related to you use your home if you don’t charge them market-rate rent. An example of that would be if you donated nights during a charity auction. Those would still be counted as personal nights.

If you rent your vacation home out for fewer than 15 days during the year, the government doesn’t consider it rental property. That can be super news for tax purposes; essentially, any income, no matter how high, isn’t included in your income for tax purposes.

On the flip side, you can only deduct property taxes and mortgage interest, so no other operating costs or depreciation. (Note that you can only deduct mortgage interest on your principal residence and one other home, and there are certain limits.)

If you do rent out your property for more than 15 days, you have to include that rent as income. You can deduct some of your operating expenses and depreciation, but — like most things when it comes to the government — there are rules. And as you can probably already guess, those rules get tricky.

Your best course of action would be to talk to your CPA or accountant. If, for some reason, that’s not an option, the IRS offers an online tool that asks you questions about your expenses, rental income, and personal use to help you decide if you need to declare that income on your taxes.

If you have questions about renting your vacation home, let us know.