Bill Guest a Garfield & Hecht, P.C. Tax Attorney Discusses Tax Rules for Rental of Your Residence.
If you own a residential dwelling that you use part of the year and rent part of the year, or plan to, there are tax rules that will affect the amount of income you must report and the expenses you can deduct. The tax rules discussed below apply whether you use the residential dwelling for a relatively small portion of the year, like a typical vacation rental property, or you use the residential dwelling for a majority of the year, like a typical primary residence. There is no limit on how many residences these income tax rules apply to for any taxpayer. There is no difference in treatment if it is a principal residence or a secondary or vacation residence. The key to when these rules apply is that the residential property must be used personally during some of the year and rented out for some of the year. The good news is that you do not have to report any rent you receive as income if you rent your dwelling for 14 days or less in a tax year. On the other hand, if you rent your dwelling for more than 14 days in a year, all of the rental income, even for the first 14 rental days, must be reported as income. When it comes to deducting expenses, there are limitations based on how much of the year you use your dwelling. However, deductions for interest and real estate taxes are not limited by the amount of your personal use, but may be limited or have diminished values by virtue of other provisions of the Tax Code. Deductions of other expenses that you incur, such as for utilities, association dues, insurance, repairs, commissions, depreciation and the like, may be limited depending on the amount of your personal use. The starting point is to determine the number of days you personally use your dwelling. Personal use days include the days you use it as well as days used by related parties even if they pay rent. Related parties are your brothers and sisters, spouse, ancestors, and lineal descendants. One exception to having to count a day as a personal use day of your dwelling is if you spend the day engaged in repair and maintenance of the dwelling. The next step in determining if deductions will be limited is to compare the number of days personally used to the number of days rented. If your personal use days are no more than 14 days or 10% of the days rented, or if 10% of the days rented is greater than 14, there is no limitation on the deductibility of the other expenses you incur that are related to the periods of rental. Note that other provisions of the Tax Code may limit your use of a net tax loss to offset other income. On the other hand, if your personal use days are more than 14 days or 10% of the days rented, or if 10% of the days rented is greater than 14, your deductions for those other expenses are limited to the amount your rental income exceeds your interest and real estate tax expenses attributable to the rental period. In other words, you won’t be allowed to have a tax loss on your return when the loss is created by these other expenses and you personally use your dwelling too much. Good record keeping of personal use days, rental days and expenses, is a necessity to substantiate what you can deduct on your income tax return. This is a summary of some very complicated tax rules. You should consult your tax advisor for how the rules apply to your specific situation. Contact Bill Guest click here.