Does renting your home make sense for you?
We are all aware that Cleveland has become a popular destination of late. Major motion pictures are being filmed here, we recently had the Rock n’ Roll Hall of Fame Induction Ceremony, and next year brings the RNC convention into town. This activity is increasing demand for short-term housing in and around downtown.
A major concern for many people considering renting out their homes is how it will affect their tax return. When considering the tax implications, it is important to look first to how long the property is rented.
Rented Less than 15 Days
If the property is rented for less than 15 days during the calendar year, then the income is not subject to tax. You are still able to deduct your mortgage interest and real estate taxes to the extent allowed as an itemized deduction on Schedule A. No other expenses or depreciation are deductible.
Rented More than 14 Days
If the property is rented for more than 14 days, the rental income is taxable. A portion of the mortgage interest, real estate taxes, insurance, maintenance, and utilities are allowed as a deduction to directly offset the rental income on Schedule E of your 1040. The balance of the mortgage interest and real estate taxes that do not relate to the rental activity would continue to be deductible on Schedule A as an itemized deduction. The balance of the other expenses are not deductible.
Personal versus Rental Use
If the home is used personally by you, a related party, rented below market, or given to a charity for more than 14 days or 10% of the rental days, then the home is considered a personal asset. You are able to deduct expenses to the extent of income but not in excess of income. Depreciation expense is also not allowed.
If, however, the personal use is less than 15 days then the property is treated as a rental property. In this case, the property can be depreciated and expenses are allowed in excess of income (subject to certain limitations under IRC Sec 469).
Proration of Expenses
Empty days are days that the home is not being used for personal use or rented out. They are treated as personal if the home is deemed personal due to usage. Empty days are considered rental if the home is deemed a rental property (personal use less than 15 days or 10% of the rental days). This is an important distinction that can affect the proration of expenses as the calculation would be rental days divided by 365 days. The numerator of rental days would be higher if it included the empty days.
Tips and Conisderations
Renting your home to take advantage of the increased demand for short-term housing can be very beneficial. Here are some tips:
- Keep a journal of the use of the property and whether it was personal, rental, etc. and who the property was used by,
- keep careful track of your receipts to substantiate expenses,
- consult with an attorney to obtain proper documents such as a lease agreement,
- review your condominium or homeowners’ association agreement to make sure you are allowed to lease your home,
- review your homeowner’s insurance policy to make sure you have appropriate coverage,
- consult with your tax advisor to make sure that you are able to make the most of this opportunity in the most tax efficient manner.
Renting out your home to strangers can be a very scary proposition. There are benefits and obviously some potential risks. If you are diligent with your recordkeeping and careful about structuring the transaction, you may be able to take advantage of this unique opportunity.
Be sure to contact your tax advisor to review the specifics of your situation and how to properly apply these rules to maximize your cash flow.
Tony Constantine is a Senior Manager in the Tax Department at Ciuni & Panichi, Inc. Tony is a Practice Leader in the firm’s Real Estate and Construction Services Group. He can be reached by calling 216-831-7171 or email him at tconstantine@cp-advisors.com.