How Renting Your Vacation Property Impacts Your Taxes | Minnestay


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How Renting Your Vacation Property Impacts Your Taxes

Added: Apr 20, 2018
Category: Vacation Property Management

How Renting Your Property Impacts Your Taxes
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Renting out a vacation home requires a great deal of preparation and just as much persistence. That is to say, the journey never stops when managing a rental property, from decorating the interior for your very first guest to repairing faulty thermostats, there’s always something on your plate when managing a rental property. Potentially more importantly, there is the matter of staying on top of rental property tax implications. In this sense, renting your vacation home is a hugely rewarding concept but there is also a certain “price” to be paid for the privilege of this extra income.

At the same time, there are also property managers who can take on the task of managing your vacation home and tax professionals who can simplify those all-important tax returns. With this in mind, renting your property can be quite an arduous task but then this is also something you can learn to manage correctly or outsource this effort to those who know precisely what to do.

Either way, renting your property is certainly no walk in the park but getting up to speed on the rental property taxes and implications of renting your vacation home is highly recommended. Here we will take a look at rental property tax implications and how to get the most out of the process.

Rental Property Taxes and Deciding to Rent Out a Vacation Property

Quite often, property owners invest with the intention of using a property as a vacation rental. Alternatively, an owner might purchase a residence but then move elsewhere without wanting to sell this particular property. As you know, there are endless reasons as to why a property or part of a property is currently idle and in which case, the owner is eager to benefit from this vacancy.

Renting out a property as a vacation home is an excellent option which can provide substantial secondary income to the owner. A rental property also provides enticing opportunities with regard to deductible expenses which can be listed on the owner's tax return.

A vacation rental property can refer to an apartment, house, mobile home, condo, or even a boat. As a rule, if you rent this property to other individuals, the income from this transaction needs to be reported as part of your federal income tax return.

Why Renting Out a Vacation Home Impacts Rental Property Taxes

Property tax is a mandatory payment to the government which is calculated based on the value of the property in question. However, if an owner decides to rent this property, the amount received for rental income is also subject to tax.

Of course, every scenario and circumstance requires unique conditions, rules, and regulations which is why property owners are often in need of advice from a tax professional.

Simply put, rental income from a vacation property is taxable but there are also certain expenses relating to the preparation and maintenance of the property which can be subtracted from this amount. At the same time, it must be known that not everything you receive from a guest is taxable and there are usually further exclusions depending on each circumstance.

Note on Vacation Rental Income for Cash Basis Taxpayers

If you happen to be a cash basis taxpayer, you will need to report any vacation rental income in the same year you receive it. Furthermore, you should deduct relevant expenses in the same year that you pay for them. Also known as cash-based accounting, this is the method which is most common and preferred with rental property owners.

The Basics on Deductible Expenses

As already mentioned, certain expenses can be deducted from your tax return including operating expenses, accidental damage or repairs, and even depreciation. In short, these expenses relate to managing and maintaining a vacation rental property which can also extend to various aspects including insurance, utilities and the cost of advertising. However, there are also exclusions in every circumstance and owners are not entitled to file any expenses for improvements to a rental property.

As you might expect, these deductions return a small percentage of the cost but they certainly add up and account for a considerable overall deduction when managed in the right way. That is to say, if you consult a tax professional, they are likely to file a comprehensive tax return which yields significantly more than if you submitted this personally. Furthermore, these professionals are familiar with the most important rental property tax implications which can save confusion and complications down the line.

In fact, most vacation property owners fail to realize a vast number of these deductibles which take little more than experience to recognize. For example, property owners can submit a Form 4562 on which they can list any expenses relating to depreciation which can be deducted in the year this expense is incurred.

Once again, tax professionals are the best place to start when it comes to identifying valid deductible expenses and filing them to make the most of your tax return.

Tips for Reporting Vacation Property Tax

Vacation property income and deductible expenses should be reported on the Supplemental Income and Loss located on Schedule E.

As already mentioned, if you also reside in the vacation property or if you use this on occasion for personal use, different rules can apply. In this instance, expenses need to be divided according to whether they are a personal or rental utility. However, this is yet another reason to consult a tax professional to ensure everything is in order with your professional vacation property.

As for reporting any deductibles arising from personal use of a vacation property such as mortgage interest or loss due to casualty, these expenses are listed in Schedule A.

If this vacation property is also your main residence, there are much stricter regulations and restrictions regarding deductible expenses. In this regard, the amount of rent received must exceed the number of deductibles for rent-related expenses.  

Moreover, if this vacation property is your residence but you rent the property for less than 15 days of the year, you do not need to report this rental income on federal tax returns.

How to Keep on Top of Rental Property Taxes

As you can see, the conditions and rules for rental property taxes vary from one circumstance to another but either way; there is an opportunity and immense benefit to renting out a vacation home. While keeping up to date is crucial to the long-term success of your vacation home, knowledge and experience is the key to keeping on top of your vacation property vacation taxes. That being said, there is no substitute for a competent tax professional who knows precisely how to help organize your finances and keep on top of your tax situation.

Looking for an experienced and knowledgeable vacation rental management company to help guide you through this tricky process? Contact us today!




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