Renting Your Vacation Home? Don’t Trip on These Income Tax Issues

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Vacation Home Rental RECENTER

With the economy on the upswing, better interest rates, and stock market gains, vacation homes and second home purchases are booming. By the lake, in the mountains, near the cost, in the desert — there are tons of great locations with plenty of fantastic properties. And sometimes a second home can actually make you money.

Do you occasionally rent out your vacation home? Services such as VRBO, HomeAway, and Airbnb are increasing in popularity, sometimes becoming a reliable second income stream for homeowners. Oftentimes the cost of maintaining these income-producing properties can be deducted. However, pitfalls abound. This report from the latest issue of Tierra Grande, the quarterly magazine produced by the Real Estate Center at Texas A&M University, spells out the particulars of how vacation homeownership can lead to a tricky situation without proper record keeping.

A 2014 tax court case highlights how poor record-keeping and the manner in which days are spent in connection with repairing a vacation rental home may eliminate eligibility to deduct losses. Furthermore, a new 3.8 percent surtax on unearned income (introduced in 2013) could produce a higher tax cost when selling income-producing real estate, including vacation rental homes. The court case and surtax are discussed here, following a summary of key vacation rental home rules

Typical expenses associated with vacation rental homes include mortgage interest and real estate taxes, which are deductible under any circumstances. In addition, if the property is rented more than 14 days, a proportionate amount of expenses such as rental management company fees, utilities, maintenance and tax depreciation may also be deductible. The latter expenses can generate a tax loss (deductible against nonrental income) if the number of personal-use days does not exceed the greater of 14 days or 10 percent of the number of rental days.
Whew! That’s a lot of legal-ese right there. But if your eyes glazed over halfway through that, let’s spell it out: Keep excellent records on how many days your vacation home was rented and how many days you used it for purposes other than maintenance and repairs. And keep track of those costs because they can be deducted as losses.
Have you ever had problems with deducting costs associated with maintaining your vacation home?