Miami Residents know that Summer is here, and so is this year’s crop of Miami summer rentals. In some areas, the market for vacation properties is even perking up after a string of down years.
If you are a vacation-home landlord or thinking of becoming one, it is time to review the tax rules on rental income from second homes. This isn’t beach reading. Apart from one simple provision, this area is among the messiest in the tax code—”worse than luxury-car depreciation and almost as bad as the alternative minimum tax,” says CPA Douglas Stives of Monmouth University in New Jersey.
First, the good news: One of the tax code’s best freebies allows homeowners who rent out their property for 14 or fewer days a year to pocket the rental income, tax-free. Often called the “Masters exemption” because it is used by homeowners near the Augusta National Golf Club, who earn as much as $20,000 during the annual tournament, this provision also is popular with people living near Super Bowl sites or national political conventions. It’s available to anyone renting out a home, and the income doesn’t have to be reported on the owner’s tax return as long the rental period is 14 or fewer days.
The taxpayer can’t take depreciation or maintenance deductions, but can deduct mortgage interest and property taxes on Schedule A. This generous break can be taken only once a year, experts say, and it can’t be taken at all if the home is rented for longer than 14 days.
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Mixed Use Florida Rentals
Things get much more complicated if a home is “mixed-use”—meaning the owner uses it himself and rents it out. In that case he has to count the rental days and determine what percentage they are of the total number of days the property was used. That gives the percentage of expenses such as maintenance, utilities, property taxes, mortgage interest and depreciation that are deductible from the rental income.
Things that Matter:
- *19% of the expenses aren’t deductible
- *Things that are deductible are the mortgage interest and property taxes
- *Details matter like days used by the owner to repair and maintain the property don’t count anywhere in the tally, but taxpayers should be sure to document them carefully, because the Internal Revenue Service is suspicious about these deductions.
- *Take pictures
Other caveats: The IRS may try to count days used by immediate family members as “personal days,” even if relatives pay a market rent. Depreciation doesn’t apply to land, only to structures, but it does extend to furniture and appliances. Whatever you do, don’t exchange checks of the same amount with friends or relatives to create fictitious rental income. What if, after all your figuring, the Schedule E shows a loss?
The complications continue. If a taxpayer’s personal use is more than 10% of the total days rented, then the losses aren’t deductible, except for property taxes and mortgage interest. If the personal use is less than 10% of the days rented, however, then joint filers with $100,000 or less of adjusted gross income can deduct up to $25,000 of losses against their ordinary income—a nice benefit.
The deduction phases out for incomes above that and disappears at $150,000. But the unused losses carry forward and can be deducted in the future. Vacations are beautiful things but if you don’t keep the proper records they can turn into a tax nightmare.
Get the full scoop directly from the Internal Revenue Service. And of course, you must consult a licensed tax advisor before taking action. Do not rely on the information provided here!