Few homeowners are aware of the tax benefits and risks of renting their home for short periods, known as “short-term rentals.”
Tax Exemption for Short-term Rentals of a Personal Dwelling
You can cash in on a tax exemption by renting your house or vacation home for short periods, provided you remain within specific parameters.
What Defines a Personal Dwelling
First, you need to make sure your home or vacation home qualifies for the exemption, which means it must qualify as a personal dwelling and not a rental business you own primarily for income purposes.
The deductibility of income from short-term rentals of a personal dwelling used to be much more significant, but, in 1976, Congress enacted Internal Revenue Code section 280A limiting how much of that income can be deducted from your taxes.
Whether your primary residence or a vacation home, a personal dwelling is defined under the act as any property where you, the owner, spend at least 14 days each year or at least 10% of the number of days you rent the space in a year, whichever is greater. In other words, if you rent the space ten months per year, you must live in the space for at least a month and a day for it to qualify as a personal dwelling rather than your rental business.
That said, not all of that income is tax-exempt.
What is the Exemption?
Just because you live in a space longer than two weeks and can, therefore, rent the space for potentially more than that, the tax exemption on income from short-term rentals of your dwelling is limited to any income earned from two weeks or less of those rentals. Renting your house or vacation home for less than 15 days keeps you from having to pay taxes on a single cent of income you received from your short-term rental, but rent your home for just 15 days, or more, and you’ll pay income tax on the whole amount, including the first 14 days.
What’s more, depending on the county where the property is located, if you rent the space for more than 14 days per year, you may also have to collect and pay room occupancy tax, which is a percentage of your monthly gross receipts from renting any room in that space.
According to the IRS, “There’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.” (Source: irs.gov/taxtopics/tc415)
This means, no matter how much money you make from these 14 days of renting, you don’t have to report the income to the IRS and, therefore, won’t have to pay any income taxes on it.
Not for “Rental Properties.”
Since, for tax purposes, your home and vacation home are considered personal residences, you cannot deduct operating expenses or take a depreciation deduction as you would if the property were an income property or rental property. You also cannot offset your income from other sources with rental expenses that exceed your rental income, as you could if your property were actually an income or rental property. Despite this, however, you may still be able to deduct some expenses, including:
- Casualty losses
- Mortgage interest
- Real estate taxes
That’s why, to take advantage of this benefit, you must personally use the dwelling in question for 15 days or more over the same year. If you turned the property into an income or rental property by the same token, you would gain the ability to deduct operating expenses but lose the tax exemption on the 14 days or less of income.
On Renting a Personal Dwelling for More Than 14 Day
If you rent out your dwelling or vacation home for even just 15 days in a given year instead of 14 or less, you’ll end up owing income taxes on all income you made on renting that year, including the first 14 rental days.
Knowing this, If you plan correctly and rent out your home or vacation home for just 14 days each year and no more, you can provide yourself a source of tax-free income to assist with your household budget.
Short-term Business Rentals of a Personal Dwelling
If you own a business, the tax advantages of short-term rentals of your dwelling or vacation home are even greater, as you can take tax deductions on business expenses related to the renting of your home.
For instance, if you hold business meetings for your own business in your home or vacation home once a month, that would equal 12 rental days per year. Since that’s less than the 14 maximum, when your business pays you for renting the space, not only is that income tax-free, you can also take a tax deduction on business expenses related to that rental.
Short-term Rentals in Charlotte
Charlotte currently has no regulations governing how short-term rentals operate. Nevertheless, inevitable questions have arisen and will continue to do so on whether Charlotte will need any such regulations, as the city’s varied zoning and development ordinances continue their overhaul into a singular, unified ordinance.
It is up to you and your tax advisor to calculate which short-term rental options would serve your financial goals and needs the best given your intentions for how much time you intend to reside in a property versus rent it.
Scott Boyar, a Southend CPA, is one such tax accountant and advisor, knowledgeable and skilled in helping North Carolinians benefit from all the tax advantages available to homeowners while limiting tax liabilities and avoiding penalties altogether. If you live in Charlotte or the surrounding North Carolina area and you’re looking for a tax advisor or cpa for small businesses, look no further than Scott Boyar, CPA, at 704-527-2725 or sboyarcpa.com.
Watch my #TaxTalk video: