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How To Avoid IRS Compliance Traps

Thursday, June 12th, 2014

With all sources of income, taxes are an important consideration. Income from your vacation rentals is no exception. With vacation rentals, there are 3 key tax considerations.

1. Personal Use and Rental Days

The number of days you personally use your vacation rental property has a significant impact on how the IRS treats your rental income:

a. If personal use is limited to 14 or fewer days or 10% of the time your property is rented, you can write-off 100% of rental expenses against rental income.

b. If personal use exceeds 14 days, you can still write-off a portion of your rental expenses against rental income. For example, if you rented your property for 90 days and had 30 days of personal use during the year, you are allowed to write-off 75% (90 rental days/120 total usage) of your rental expenses against rental income.

c. If you rent your property for 14 days or less, you are not required to report the rental income for income tax purpose.

2. Common Rental Expenses
The following is a list of common rental expenses that may be written-off against rental income:

* Management Fees
* Mortgage Interest
* Mortgage Points
* Repairs
* Taxes
* Utilities
* Advertising
* Cleaning & Maintenance
* Commissions
* Depreciation
* Insurance
* Legal/Professional Fees

3. Passive vs Active Income
The IRS usually considers income from rental real estate to be a passive activity; that is, you get income mainly for the use of your property rather than for services provided. The IRS allows you to off-set passive losses against passive income, not ordinary income such as wages. Any excess passive losses are carried forward to the next tax year.

If you are actively involved in the rental of your vacation home, up to $25,000 of the loss from your rental property could be deductible against ordinary income. There are restrictions and limitations if you make more than $100,000 annually.

At VRS we recognize that keeping more of your rental income is one thing all vacation homeowner have in common. That is why we provide essential rental management services as an affordable fixed monthly price. Compliance Services are just $50 per month.

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