Short-Term Home Rental Rules
When renting your home, it’s essential to understand the tax rules in advance. This includes rental of your primary or secondary home(s), private rental-by-owner agreements, and those facilitated through rental services like Air BnB, HomeAway, OneFineStay and FlipKey.
There are several factors at play and the tax implications associated with them vary depending on the length of the rental period and the days of personal usage.
Rented for 14 days or less during the year
If you rent out your home for 14 days or less during the year, the rental income is not subject to taxation. This means you do not report the rental income on your tax return, and therefore you may not deduct any rental expenses. In this scenario, the home is considered a personal residence and you continue to deduct mortgage interest and property taxes as such.
Rented for 15 days or more
If you rent out your home for 15 days or more during the year, you must report the rental income and related direct and indirect rental expenses on your tax return.
Direct Rental Expenses
You are allowed to deduct 100% of your direct rental expenses. Direct expenses are those incurred as a result of the rental activity such as rental agency fees or commissions, advertising, cleaning costs, travel and transportation costs, supplies and repairs solely on the rental portion of your home.
Indirect Rental Expenses
You may also deduct a portion of the indirect expenses to own and operate your entire home, such as mortgage interest, real estate taxes, utilities, insurance, repairs and depreciation. You must allocate these indirect expenses based on the amount of days available for rent over total days used during the year. In addition, if only a portion of the home is rented, these expenses must also be allocated based on the fraction of the rental square footage over the total square footage of the home.
The tax treatment of the resulting rental income and expenses falls under one of two rules detailed below, and is determined based on the number of days rented as well as the days you (and related persons) used the property personally.
- Personal use more than 14 days or 10% of days rented
If you or persons related to you use the home for the greater of 14 days or 10% of the total days the home was rented, any resulting net rental loss will be limited to the amount of the rental income–and the remaining loss cannot be carried over to offset future income.
- Personal use less than 14 days or 10% of days rented
If you or persons related to you use the home for less than 14 days or 10% of the total days the home was rented, any resulting net rental loss may be deducted–but it will be subject to the passive activity rules described below.
Passive Activity Rules
Tax law specifies that all rental activities are passive activities. Therefore, the rental of your home will be subject to Passive Activity Loss Limitations. This means that passive losses from the rental can only be deducted to the extent of passive income you may have from other sources. If you actively participate in the rental real estate activity, you will qualify for the $25,000 special allowance (which begins to phase out when Modified Adjusted Gross Income exceeds $100,000).
Activities Not Considered as Rental
There are several instances in which a taxpayer’s activity may be treated as a non-rental activity. If a non-rental activity occurs, the passive activity loss rules do not apply. This applies when:
- The average rental is 7 days or less, and
- The average period of rental use is 30 days or less and significant personal services are provided.
The Bottom Line
Owners who rent out their personal residence must always be aware of the tax implications associated with the rental. Because the tax laws in place for these cases are often complicated and require a close look at all the details, we always recommend that you consult with a qualified tax specialist. We at FF&F are experienced in using our comprehensive understanding of the applicable laws at play to assist you in determining the best tax strategies for every scenario
For more information on short-term rental rules or our services, please contact us at firstname.lastname@example.org or (212) 245-5900.
Lounise George, MBA, is a Tax Manager who has been with FF&F for 9 years. She has over 15 years of accounting experience, and since joining FF&F has worked with a diverse group of clients. Lounise specializes in High Net Worth Individuals & Non-Profit Organizations.