Renting Out a Home

Homes which are both rented out and used for personal use during the same tax year are considered mixed-use homes and subject to specific tax reporting rules. Taxpayers need to determine the homes tax classification and apply the reporting rules that correspond to their level of use. Do you know which rules apply to the home you are renting out?

In order to determine which tax reporting rules apply, a taxpayer must first classify the mixed-use home as one of the following based on the number of days of personal use during the tax year:

• Personal-use Property – The number of personal use days are more than 14 days and the number of days rented are 14 days or less;
• Rental Property – The number of personal used days are no more than the greater of (1) 14 days or (2) 10% of the number of days rented at fair rental value; or
• Dwelling Unit Used as a Home (i.e. vacation home) – The number of personal days are more than the greater of (1) 14 days or (2) 10% of the number of days rented at fair rental value.

If the home is classified as a personal-use property, the rental income received is not reported, mortgage interest (if considered the taxpayer’s principal or qualified second home) is deducted on Schedule A, property taxes are deducted on Schedule A, direct rental expenses are non-deductible, and other expenses (e.g., maintenance, insurance and depreciation) are non-deductible.

If the home is classified as a rental property, rental income is reported on Schedule E, the portion of the mortgage interest allocated to the rental activity is deducted on Schedule E (the personal-use portion is non-deductible), the portion of the property taxes allocated to the rental activity is deducted on Schedule E (the personal-use portion is deducted on Schedule A), direct rental expenses are deducted on Schedule E, and the portion of other expenses allocated to the rental activity are deducted on Schedule E (the personal-use portion is non-deductible).

If the home is classified as a vacation home, rental income is reported on Schedule E, the portion of the mortgage interest allocated to the rental activity is deducted on Schedule E (the personal-use portion is deducted on Schedule A if it qualifies as a qualified second home), the portion of the property taxes allocated to the rental activity is deducted on Schedule E (the personal-use portion is deducted on Schedule A), direct rental expenses are deducted on Schedule E, and the portion of other expenses allocated to the rental activity are deducted on Schedule E but are limited to gross rental income less mortgage interest, property taxes and direct rental expenses (personal-use portion is non-deductible).

Expenses for a mixed-use home (regardless of whether it’s classified as rental property or a vacation home) are allocated based on the number of days rented at fair rental value divided by the total number of days the property is occupied (except for mortgage interest and property taxes which can be allocated based on the number of days rented at fair rental value divided by the number of days in the year).

Mixed-use homes can be a useful tax planning asset when a taxpayer’s personal use is managed to optimize the deductibility of the expenses related to the home. Contact Flexible Accounting Services of the Triangle today and let us help you maximize the deductibility of your home’s expenses.