Tax Rules for Renting Out Your U.S. Vacation Home
If you own a U.S. vacation home – or are thinking of buying one – make sure you understand the U.S. tax deductions* that are available to you if you rent it out.
Types of Vacation Homes
A vacation home is not always limited to a cabin in Point Roberts, WA or a condo in Maui. Boats and RVs can count as long as they have a sleeping area, and cooking and bathroom facilities.
Is your Vacation Home a Vacation Home?
Tax deductions for renting out your U.S. vacation home vary greatly depending on how much you use the home and whether you rent it out. If you bought your vacation home solely for personal enjoyment, you could only deduct your mortgage interest and property taxes (as itemized deductions, if filing a U.S. Form 1040 as a U.S. citizen or resident).
If you rent your vacation home for less than 15 days during the year, you do not have to report the income on your U.S. tax return. While you can still deduct your mortgage interest and property taxes as itemized deductions, you cannot deduct other property related expenses.
Tax Deductions for a Rental Property
If you limit your personal use to no more than the greater of 14 days or 10% of the time the home is rented, all rental expenses are generally deductible. You must divide your expenses between rental and personal use days. The rules change if you exceed this threshold (see Personal Use of a Vacation Home later).
For a property that is exclusively a rental property (or has limited personal use), you can deduct numerous expenses including:
- Advertising
- Travel (if related to your rental activity)
- Cleaning & maintenance
- Insurance
- Legal & professional fees
- Management fees
- Mortgage interest and property taxes
- Repairs & supplies
- Utilities
You can also deduct depreciation on the part of the property used for rental purposes. Depreciation is the reduction in the value of an asset (e.g. a building) with the passage of time, due in particular to wear and tear.
Where expenses exceed income, the overall loss from a rental property may be limited. Generally, losses from a rental property are not available to offset income, other than passive activity income. You can carryforward disallowed passive rental losses to the next taxable year.
To maximize the deduction for losses you need to be actively involved in the rental property. This means performing such management decisions as approving new tenants, deciding on rental terms and approving expenditures.
Personal Use of a Vacation Home
If you rent out your vacation home while personally using it for more than the greater of 14 days or 10% of the total days it is rented to others at a fair rental price, some or all of the rental expenses that exceed rental income cannot be used to offset income from other sources. The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property.
The key to maximizing deductions is keeping annual personal use of your vacation home to less than 15 days or 10% of the total rental days, whichever is greater. Doing this ensures that your vacation home is considered a rental property.
Conversion of a Vacation Home to a Principal Residence
An owner of a U.S. vacation home may not be able to avoid paying U.S. tax on gains arising on a sale of the property by converting it into a principal residence prior to the sale. The capital gains exclusion that is normally available on the sale of a home that was owed and used by a taxpayer as a principal residence for at least 2 of the 5 years ending on the date of sale is reduced on a pro rata basis to reflect the period of rental, vacation home or other “nonqualifying use” since January 1, 2009.
If you would like to know more about taxation of your U.S. vacation home, please contact your DMCL advisor.
*For a non-resident of the U.S., an election must be filed with a U.S. tax return to be taxed on a net rental income, otherwise a flat 30% tax applies to the gross rents. Strict rules apply to the timing and content of the election, even where expenses exceed income.
This article provides general information only and should not be relied upon as advice