Vacation home rentals use special tax calculations

Q: We have a cabin up in the McCall area that we use a few times a year. Since it sits empty for much of the year we are considering renting it on a limited basis. I know we will need to report the rent received as income, but will we be able to deduct all the expenses of maintaining the property?

A: With one exception discussed below, the rental income you receive should be reported on Schedule E, Supplemental Income and Loss, and be included in your federal income tax return. This is true for your cabin, as well as any other vacation home, apartment, condominium, mobile home, or even any boat you own and rent during the year.

The one special exception to this general rule applies if you use the cabin as a residence and rent it for fewer than 15 days per year. In this case you get a nice tax break: You are not required to report any of the rental income. You are considered to use the property as a residence if your personal use is more than 14 days, or more than 10 percent of the total days it is rented to others if that figure is greater.

Many expenses related to the rental property can be deducted to help offset the reported income. Generally you will need to divide the expenses between rental use and personal use and report the expenses allocated to the rental on Schedule E.

If the expenses are in excess of the rental income, special rules kick in that limit the amount you can deduct. Generally, the expenses will be limited to the amount of rental income; you are not allowed to report a loss on a vacation home rental. Any expenses incurred in a year, but not allowed due to this limitation, can be carried forward and used in following years to offset future rental income.

Any expenses related to your personal use that would be deductible even if the property were not a rental (mortgage interest, property taxes or casualty losses) can be reported on Schedule A as itemized deductions. Consequently you will be splitting many of the expenses and reporting a portion on Schedule E as rental expenses, and a portion on Schedule A as personal itemized deductions.

Generally, the allocation of expenses to rental use is based on a ratio of the rental use days divided by the total days the property is used. Likewise, the personal use is based on personal days used divided by total days used. So if you rent your cabin for 20 days during the year and use it personally for 80 days (total use of 100 days), the rental portion is 20 divided by 100, or 20 percent, and the personal portion is 80 divided by 100, or 80 percent. There is another special rule that allows you to allocate the mortgage interest and property taxes based on rental days divided by 365 days in the year if that is more advantageous.

Obviously there is a bit of calculating needed to split the expenses and extra work to report the rental income. Take your time with this and keep good records, and you should be able to work through the numbers. And let me know more about your cabin. I might need to get away one of these days!

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To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.

Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.

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