Some qualifying vacation homes or "second homes" you may not have known about are timeshares, trailers, boats, motor homes and campers. Three things must be present to qualify it as a vacation home: facilities for sleeping, for cooking, and for the toilet. If it has these facilities, then you are the owner of a second home for tax purposes. While it's very simple to qualify as a vacation rental, the set of tax rules that come along with owning it are somewhat more complex.
While renting out your property during the summer has great benefits, you must be aware of the tax implications of residential and vacation home rentals.
Vacation Home. This can be a house, apartment, condominium, mobile home, boat, vacation home or similar property. It's possible to use more than one unit as a residence during the year.
Used as a Home. Rental expenses can't be more than the rent received if the property is used as a home.
Personal Use. Personal use includes anyone paying less than a fair rental price. It is use by the owner, their family, friends, or other property owners and their families.
Divide Expenses. Special rules apply to the rental expenses of a property used also used as a residence during the taxable year. Rental income must usually be reported in full, and any expenses must be divided between personal and business.
How to Report. Schedule E is used to report rental income and rental expenses. Rental income may also be subject to Net Investment Income Tax. computed on Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts and reported on Form 1040.
Special Rules. If the home unit is rented out fewer than 15 days during the year, none of the rental income is reportable and none of the rental expenses are deductible.
Vacation Home
If you receive rental income for the use of a vacation home, you can deduct expenses including mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation to reduce the amount of rental income subject to tax.
Used as a Home
The amount of expenses you can deduct is limited if you use the vacation you're renting out as a residence. It's considered to be your residence if you use it for personal purposes during the year for more than the greater of:
14 days, or
10% of the total days you rent it to others at a fair rental price.
It's possible to have more than one dwelling unit as a residence during the year; for example, if you live in your main home for 11 months, it's a dwelling unit used as a residence, and if you live in your vacation home for the other 30 days of the year, it is also a residence, unless you rent it to others at a fair rental value for 300 or more days during the year. You can read more information at IRS Topic No. 415 Renting Residential and Vacation Property.
Dividing Expenses
If you have property that is rented out for more than 14 days during the year, and you or your family, or any co-owner or his or her family use it for personal purposes for even one day of the year, you must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won't be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest, real estate taxes, casualty losses, and rental expenses like realtors' fees and advertising costs). The personal expenses will not be deductible unless you itemize your deductions and claim mortgage interest, property taxes, casualty losses, and rental expenses from federally declared disasters on Schedule A (Form 1040), Itemized Deductions.
How to Report
If you receive money for the use of a house that you also use as your personal residence, you report the income and expenses on Form 1040, U.S. Individual Income Tax Return and Schedule E (Form 1040), Supplemental Income and Loss. If you have Net Investment Income Tax, compute the tax on Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts and report it on Form 1040.
Special Rules
De Minims Rule If you use your vacation home as a residence and rent it for fewer than 15 days, you don't report any rental income or deduct any rental expenses.
Passive Activities and At-Risk Rules If you don't use your vacation home a residence and you're renting to make a profit, your deductible rental expenses could be more than your gross rental income. Your rental losses could be limited by the "at-risk" and/or the passive activity loss rules. See IRS Publication 925, Passive Activities and At-Risk Rules for more information.
Real estate rentals are passive activities subject to Net Investment Income Tax unless you own the rental and actively participate in the rental activity (by making key decisions or arrangements for others to provide services, or performing substantial services and qualifying as a real estate professional). The 3.8 (NIIT) applies to individuals whose modified adjusted gross income exceeds $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for all others. IRS Topic No. 559 Net Investment Income Tax has more information.
You don't have to apply expense limitations if you convert a personal residence to a rental during the year and rent or try to rent it for at least 12 consecutive months, or would have except that you sold or exchanged it before the 12 months were up,
See the forum post: IRS Video: Renting Your Vacation Home.
Resources:
Publication 527, Residential Rental Property (Including Rental of Vacation Homes)
IRS Topic No. 414 Rental Income and Expenses
Interactive Tax Assistant Interview: Is My Residential Rental Income Taxable and/or Are My Expenses Deductible?