Deducting a part-time rented home

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Q. I read your article about Airbnb rentals for your primary home and deductions, but what about rental income for a home that is mostly rented out for summer months? We only use it sporadically the rest of the year. Is the income still taxed the same way and the deductions based on only the days rented?
— Sometimes landlord

A. It depends.

In order to figure out the tax treatment of a residence you rent out, you have to add up the number of rental days and the number of personal days.

If the number of personal days you used the property exceeds the greater of 14 days or 10 percent of the number of days you rented the property out, then the property is considered to be used as a home,” said Laurie Wolfe, a certified public accountant with Lassus Wherley in New Providence.

She said the treatment in this event would be exactly as laid out in the answer to the question about the Airbnb rental.

But keep reading.

If you do not use your property enough for it to be considered a home under this test, then the property is considered primarily a rental property, with some personal use, Wolfe said.

The expenses are still allocated between the rental piece and the personal piece.

“You divide the number of days rented by the total number of days used for both purposes,” she said. “In the Airbnb example, the divisor was 365 because the home was presumed used the entire year, whether for rental or personal purposes.”

Wolfe offered this example: Let’s say you rent your property for 90 days in the summer. During the year, you use 10 days for personal purposes. The total number of days used is 100. In this case, your property is not being used as a home because you used it for less than the greater of 14 days or 9 days (10% X 90 days), she said.

“If you have $20,000 of expenses related to the home, then the portion allocable to the rental piece would be $20,000 X (90/100), or $18,000. If your rental income was $10,000, you have an $8,000 loss,” Wolfe said. “Because your home is not treated as a home, you could potentially take a loss on your tax return.”

The biggest difference between having your property treated as a rental property instead of as a home is that your expenses are not limited to your income, Wolfe said. That means you can potentially take a loss and offset some of your other ordinary income.

Sounds great, right? Not so fast.

“Losses from rental activities are limited to $25,000 per year if you make $100,000 or less per year ($50,000, if you are single),” Wolfe said. “If you make more than these amounts, the amount allowable is reduced.”

Once your income exceeds $150,000 for married persons ($75,000 for single people), no amount is allowed in that year, Wolfe said.

All is not lost, however. The unallowed portion is carried forward indefinitely, and if not used prior to eventual sale, may be deducted in full in the year of sale, Wolfe said.

She says you should also know that losses from rental activities are only allowable if you own at least 10 percent of the property and you make management decisions with respect to tenants, lease terms and expenditures.

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