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Understanding the tax implications of vacation home renting

With the expanding popularity of short-term rental programs like “HomeToGo,” “AirBNB” and “HomeAway,” increasing numbers of homeowners are offering to let strangers use their houses, apartments and condos. These involve allowing someone to use the home for a set time for a fee, similar to staying in a hotel.

Short-term rentals are very profitable for property owners, especially those centered around holidays, festivals, state fairs or sporting events. Some people just prefer an apartment or home instead of an impersonal hotel. The reasons for this vary from person to person, but they include ease of access to cooking facilities, privacy, amenities, and close proximity to their desired location.

In theory, these are simple transactions for both the renter and the property owner, but in reality, there are actually numerous tax considerations for these services. These include:

  • Property designation is important – the difference between a property being a primary residence or a vacation home is hugely important when it comes to deductibility of taxable income and rental expenses (for such things as maintenance, repair and solicitation). Deductions for expenses are limited to the rental income if the locations is a primary residence, but if it’s a vacation home, no such limits exist.
  • Eligible residences vary – nearly any type of dwelling or structure might qualify as a rental property for this purpose, including homes, trailers, “tiny homes,” condos, apartments, and even boats.
  • Time-specific considerations – should the home be rented for less than 15 days in a single calendar year, rental expenses are not eligible for deduction, and the homeowner isn’t required to report income
  • “Personal use” is not eligible – use of the property by the owner(s), friends, family, acquaintances or anyone else who is not charged “fair rental value” for use is ineligible for deduction, and no income has to be reported  

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