Taxpayers must be aware of potential tax liabilities when renting out a vacation home. Renting out a vacation home can lead to potential tax liabilities; taxpayers should be aware.

Renting, owning, or even considering renting or owning a second home can have some significant tax traps for unwary owners. To ensure you don’t end up blindsided or beat up, it is important to understand the vacation home rental tax rules.

Generally speaking, under the rules of Section 280A of the tax code, you need to calculate the percentage of rental use and then you can write off that percentage of the expenses, but no more than the rental income you earned. For example, if you personally used a vacation home for 25 days and rented it for 75 days, the rental use would equate to 75 percent of the overall use and you can write off up to 75 percent of the expenses. It’s important to remember that you can’t write off more expense that you earned in rent.

Fortunately, there are some exceptions to the general vacation home rental rule of Section 280A. One is sometimes called the Augusta rule because homeowners in Augusta Georgia, rumor says, make heavy use of it. If a homeowner rents their home for fourteen days or less and uses it as a residence for more than fourteen days, the homeowner can exclude the income from taxation. Though the homeowner doesn’t get to deduct expenses, they do still enjoy the benefit of tax-free income.

Another common scenario is when your personal use is very minimal. When this is the case, you also allocate expenses between personal use and business use, though Section 280A doesn’t prevent you from deducting a loss on the rental. To qualify for this exception, you need to use the property for the lessor of fourteen days or ten percent of the days rented.

It’s important to be aware of the rules and regulations surrounding vacation home rental taxes in order to make sure you’re not losing out on any potential savings. To learn more, the Internal Revenue Service provides a useful publication on Renting Residential and Vacation Property. Additionally, you can read our blog posts on Vacation Rental Property and Surviving Short-term Rental Audits for more information.

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