Renting Your Home or Vacation Home
If youown a home in a vacation locale – whether it is your primary residence or avacation home – and are considering renting it out to others, there arecomplicated tax rules referred to as the “vacation home rental rules”that you need to be aware of.
Generally, the tax code breaks a “vacation rental” into three categories, eachwith a different treatment for income and expenses:
Rented Fewer than 15 Days – If yourent your home for fewerthan 15 days during the tax year, the tax code says that you do notneed to report the income and that you can still deduct 100% of the propertytaxes and qualified mortgage interest as an itemized deduction. Yes, you heardme correctly: the government is actually allowing you to ignore the income,regardless of the amount, if you rent the home for fewer than 15 days duringthe year. This rule offers some opportunities for substantial tax-free income,especially for more expensive homes. Here are some examples:
Rental as a film location -Typically, film production companies will pay substantial amounts (thousandsper day) for the short-term use of homes as movie sets. Individuals with uniqueproperties can register with a local film location company.
Home in a vacation locale - Individuals with homes in popular tourist or vacationlocales can rent their homes out to vacationers in their area while they are onvacation themselves.
Home in the area of a special event - When a one-time or special event such as a major sportsevent (think the Super Bowl) or convention comes to town, hotel rooms may bescarce or even fill up. Homeowners in these locations may want to rent theirhomes short-term during the activity while getting out of town to avoid thecrowds.
However, be careful - if the rental goes over 14 days, theincome is no longer tax-free. When calculating the number of days, thedefinition of a day is generally “the 24-hour period” for which a day’s rentalwould be paid. Thus, a person using a dwelling unit from Saturday afternoonthrough the following Saturday morning would generally be treated as havingused the unit for seven days even though the person was on the premises oneight calendar days.
Even though the income is tax-free, the property tax and interest for theperiod is still deductible, directly related rental expenses such as agentfees, utilities, post-rental cleaning, etc. are not deductible.
Rented 15 Days or More - Whenthe home is rented 15 days or more, the income must be reported.However, the tax treatment depends upon how many days you used the homepersonally:
Personal Use More Than 10% of the Rental Days - In this scenario, no rental tax loss is allowed. Let’sassume that the personal use of the home is 20%. As for the remaining 80%, itis used as a rental. The rental income is first reduced by 80% of the taxes andinterest; if, after deducting the interest and taxes, there is still a profit,the direct rental expenses (such as the rental portion of the utilities,insurance and any other direct rental expenses) are deducted, but not more thanwill offset the remaining income. If there is still a profit, you can takedepreciation, but it is again limited to the remaining profit. End result: No loss is allowed,but any remaining profit is taxable. The other personal 20% of the interest andtaxes is deducted as an itemized deduction subject to mortgage interest andAlternative Minimum Tax (AMT) limitations. Take note that if the rental income becomesless than the business portion of the interest and taxes, the balance of theinterest and taxes is still deductible as home mortgage interest and taxes.
Personal Use 10% or Fewer of the RentalDays - In this scenario, the home’s use wouldbe allocated into two separate activities, a rental and a second home. Let’ssay that the home is used 5% for personal use: 5% of the interest and taxes aretreated as home interest and taxes that can be deducted as an itemizeddeduction. The other 95% of the interest and taxes are rental expenses,combined with 95% of the insurance, utilities, and allowable depreciation and100% of the direct rental expenses. The result is a deductible tax loss, whichis combined with all other rental activities and limited to a $25,000 loss peryear for taxpayers with adjusted gross incomes (AGI) of$100,000 or less. This loss allowance is ratably phased out between $100,000and $150,000 of AGI. Thus, if your income exceeds $150,000, the loss cannot bededucted; it is carried forward until the home is sold or there are gains fromother activities that can be used to offset the loss.
When figuring the personal use days,include days used by an owner, co-owner, or family member of the owner/co-owneras well as days used under a reciprocal arrangement. However, you can exclude“fix-up” days, which are days spent repairing and maintaining the property.
Word of Caution
-Beginning in 2013, passive rental income is subject to the new 3.8% tax on netinvestment income that is part of the Affordable Care Act (“Obamacare”). So ifthe net result from renting the home is a profit, in addition to being subjectto regular tax, the profit will also be subject to the netinvestment income tax. The gain from the sale of your primary home(in excess of the allowable home gain exclusion) and the gain from the sale ofyour second home (even if you never had rental income from it) are also subjectto the 3.8% tax on net investment income in addition to the capital gains tax.
A number of other rules apply to special situations not covered here. If youhave questions about how the vacation rental rules will apply to your uniquecircumstances, please give this office a call.
Tax Benefits for Military Personnel
If you’rea member of the U.S. Armed Forces, there are many tax benefits that may applyto you. Special tax rules apply to military members on active duty, includingthose serving in combat zones. These rules can help lower your federal taxesand make it easier to file your tax return. Here are some of the more prominentof those benefits:
Combat Pay Exclusion - If you are an enlisted member of the military serving ina combat zone you can exclude from taxation your pay for any month (one day ofa month counts as a full month) you serve in a combat zone. An officer’sexclusion is limited to the highest rate for enlisted personnel. This exclusionis automatically computed by the military and the excludable amounts will notappear on your W-2 form. If you qualify for an Earned Income Tax Credit (EITC)you may elect to include or not include the excluded combat pay in the EITCcomputation, thus allowing you the benefit of maximizing the credit with orwithout the exclusion while the excluded income remains tax free.
Moving Expenses - To deduct moving expenses, a military taxpayer usually mustmeet the general time and distance tests that apply to all taxpayers. However,if you are on active duty and move because of a permanent change of station,you do not need to meet those tests. A permanent change of station includes: amove from the military member’s home to his or her first post of active duty, amove from one permanent post of duty to another, and a move from the last postof duty to the member’s home or to a nearer point in the United States. Themove must generally occur within one year of ending active duty service.
Reservists’ Travel Deduction - If you are an Armed Forces reservist who travels morethan 100 miles away from home and stays overnight in connection with service asa member of a reserve component, you can deduct travel expenses as anadjustment to gross income. This is in lieu of deducting those expenses as amiscellaneous itemized deduction (subject to the 2% of AGIlimitation). Thus, you can take this deduction even if you do not itemize yourdeductions. The deduction includes unreimbursed expenses for transportation,meals (subject to the 50% limit), and lodging, but the deduction is limited tothe amount the federal government pays its employees for travel expenses.
Combat Zone and Qualified Hazardous Duty AreaExtensions - For military taxpayers in a combatzone or qualified hazardous duty area, the deadlines for taking actions withthe IRS are extended. The extension is for 180 consecutive daysafter the last day the military taxpayer was in a combat zone or qualifiedhazardous duty area or the last day of any continuous qualified hospitalizationfor injury from service in the combat zone or qualified hazardous duty area. Inaddition, the 180 days is also extended by the number of days that were leftfor the individual to take an action with the IRS whenthey entered a combat zone or qualified hazardous duty area.
Extension To Pay Tax When Not In a Combat Zone - A member of the Armed Forces may delay payment of incometax (but not the employee’s share of Social Security and Medicare taxes) thatbecomes due before or during military service. To qualify, the service membermust be performing “military service” AND notifythe IRS in writing that his or her ability to pay the income tax ismaterially affected by the military service.
If the IRS approves the request, the service member will be allowed upto 180 days after termination or release from military service to pay the tax.If the tax is paid in full by the end of the deferral period, no interest orpenalty will be charged for that period.
Home Mortgage Interest & Taxes - You can deduct qualified mortgage interest and realestate taxes as an itemized deduction, even if they are paid with nontaxablemilitary housing allowance pay. The home mortgage interest is, however, stillsubject to the general rules for deducting home mortgage interest.
Home Sale Gain Exclusion -Taxpayers are allowed to exclude $250,000 ($500,000 if filing a joint returnwith a spouse and both qualify) of gain from a home sale if it was owned andused as a principal residence for two of the five years prior to the sale. Thefollowing special rules apply to military personnel:
Reduced exclusion - If yousell your primary residence and do not meet the two-out-of-five-years ownershipand use tests due to a move to a new permanent duty station, you may qualifyfor a reduced maximum exclusion amount.
Extended test period - Youmay choose to suspend the 5-year test period for ownership and use during anyperiod you serve on qualified official extended duty. The period of suspensioncannot last more than 10 years and cannot be suspended for more than oneproperty at a time.
Uniform Deduction - If youitemize your deductions you can deduct the costs and upkeep of certain uniformsthat regulations prohibit you from wearing while off duty. However, you mustreduce your deduction by any reimbursement you receive for these costs.
Signing Joint Returns
- Both spouses normally must sign joint income tax returns.However, when one spouse is unavailable due to certain military duties orconditions, the other may, in some cases, sign for both spouses, or will need apower of attorney to file a joint return.
If you have questions related to these and other benefits provided to membersof the military, please call our office
[h=1]Franklin Katz, RTRP, ATP, PA, PB[/h][h=1]Frank's Tax & Business Service[/h][h=1]315 E. King St.[/h][h=1]Kings Mountain, NC 28086[/h][h=1]704-739-4039 [/h][h=1]E-Mail: [email protected])[/h][h=1]Web: www.prep.1040.com/frankstax[/h][h=1]IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.
[/h]
[h=1] [/h]
If youown a home in a vacation locale – whether it is your primary residence or avacation home – and are considering renting it out to others, there arecomplicated tax rules referred to as the “vacation home rental rules”that you need to be aware of.
Generally, the tax code breaks a “vacation rental” into three categories, eachwith a different treatment for income and expenses:
Rented Fewer than 15 Days – If yourent your home for fewerthan 15 days during the tax year, the tax code says that you do notneed to report the income and that you can still deduct 100% of the propertytaxes and qualified mortgage interest as an itemized deduction. Yes, you heardme correctly: the government is actually allowing you to ignore the income,regardless of the amount, if you rent the home for fewer than 15 days duringthe year. This rule offers some opportunities for substantial tax-free income,especially for more expensive homes. Here are some examples:
Rental as a film location -Typically, film production companies will pay substantial amounts (thousandsper day) for the short-term use of homes as movie sets. Individuals with uniqueproperties can register with a local film location company.
Home in a vacation locale - Individuals with homes in popular tourist or vacationlocales can rent their homes out to vacationers in their area while they are onvacation themselves.
Home in the area of a special event - When a one-time or special event such as a major sportsevent (think the Super Bowl) or convention comes to town, hotel rooms may bescarce or even fill up. Homeowners in these locations may want to rent theirhomes short-term during the activity while getting out of town to avoid thecrowds.
However, be careful - if the rental goes over 14 days, theincome is no longer tax-free. When calculating the number of days, thedefinition of a day is generally “the 24-hour period” for which a day’s rentalwould be paid. Thus, a person using a dwelling unit from Saturday afternoonthrough the following Saturday morning would generally be treated as havingused the unit for seven days even though the person was on the premises oneight calendar days.
Even though the income is tax-free, the property tax and interest for theperiod is still deductible, directly related rental expenses such as agentfees, utilities, post-rental cleaning, etc. are not deductible.
Rented 15 Days or More - Whenthe home is rented 15 days or more, the income must be reported.However, the tax treatment depends upon how many days you used the homepersonally:
Personal Use More Than 10% of the Rental Days - In this scenario, no rental tax loss is allowed. Let’sassume that the personal use of the home is 20%. As for the remaining 80%, itis used as a rental. The rental income is first reduced by 80% of the taxes andinterest; if, after deducting the interest and taxes, there is still a profit,the direct rental expenses (such as the rental portion of the utilities,insurance and any other direct rental expenses) are deducted, but not more thanwill offset the remaining income. If there is still a profit, you can takedepreciation, but it is again limited to the remaining profit. End result: No loss is allowed,but any remaining profit is taxable. The other personal 20% of the interest andtaxes is deducted as an itemized deduction subject to mortgage interest andAlternative Minimum Tax (AMT) limitations. Take note that if the rental income becomesless than the business portion of the interest and taxes, the balance of theinterest and taxes is still deductible as home mortgage interest and taxes.
Personal Use 10% or Fewer of the RentalDays - In this scenario, the home’s use wouldbe allocated into two separate activities, a rental and a second home. Let’ssay that the home is used 5% for personal use: 5% of the interest and taxes aretreated as home interest and taxes that can be deducted as an itemizeddeduction. The other 95% of the interest and taxes are rental expenses,combined with 95% of the insurance, utilities, and allowable depreciation and100% of the direct rental expenses. The result is a deductible tax loss, whichis combined with all other rental activities and limited to a $25,000 loss peryear for taxpayers with adjusted gross incomes (AGI) of$100,000 or less. This loss allowance is ratably phased out between $100,000and $150,000 of AGI. Thus, if your income exceeds $150,000, the loss cannot bededucted; it is carried forward until the home is sold or there are gains fromother activities that can be used to offset the loss.
When figuring the personal use days,include days used by an owner, co-owner, or family member of the owner/co-owneras well as days used under a reciprocal arrangement. However, you can exclude“fix-up” days, which are days spent repairing and maintaining the property.
Word of Caution
-Beginning in 2013, passive rental income is subject to the new 3.8% tax on netinvestment income that is part of the Affordable Care Act (“Obamacare”). So ifthe net result from renting the home is a profit, in addition to being subjectto regular tax, the profit will also be subject to the netinvestment income tax. The gain from the sale of your primary home(in excess of the allowable home gain exclusion) and the gain from the sale ofyour second home (even if you never had rental income from it) are also subjectto the 3.8% tax on net investment income in addition to the capital gains tax.
A number of other rules apply to special situations not covered here. If youhave questions about how the vacation rental rules will apply to your uniquecircumstances, please give this office a call.
Tax Benefits for Military Personnel
If you’rea member of the U.S. Armed Forces, there are many tax benefits that may applyto you. Special tax rules apply to military members on active duty, includingthose serving in combat zones. These rules can help lower your federal taxesand make it easier to file your tax return. Here are some of the more prominentof those benefits:
Combat Pay Exclusion - If you are an enlisted member of the military serving ina combat zone you can exclude from taxation your pay for any month (one day ofa month counts as a full month) you serve in a combat zone. An officer’sexclusion is limited to the highest rate for enlisted personnel. This exclusionis automatically computed by the military and the excludable amounts will notappear on your W-2 form. If you qualify for an Earned Income Tax Credit (EITC)you may elect to include or not include the excluded combat pay in the EITCcomputation, thus allowing you the benefit of maximizing the credit with orwithout the exclusion while the excluded income remains tax free.
Moving Expenses - To deduct moving expenses, a military taxpayer usually mustmeet the general time and distance tests that apply to all taxpayers. However,if you are on active duty and move because of a permanent change of station,you do not need to meet those tests. A permanent change of station includes: amove from the military member’s home to his or her first post of active duty, amove from one permanent post of duty to another, and a move from the last postof duty to the member’s home or to a nearer point in the United States. Themove must generally occur within one year of ending active duty service.
Reservists’ Travel Deduction - If you are an Armed Forces reservist who travels morethan 100 miles away from home and stays overnight in connection with service asa member of a reserve component, you can deduct travel expenses as anadjustment to gross income. This is in lieu of deducting those expenses as amiscellaneous itemized deduction (subject to the 2% of AGIlimitation). Thus, you can take this deduction even if you do not itemize yourdeductions. The deduction includes unreimbursed expenses for transportation,meals (subject to the 50% limit), and lodging, but the deduction is limited tothe amount the federal government pays its employees for travel expenses.
Combat Zone and Qualified Hazardous Duty AreaExtensions - For military taxpayers in a combatzone or qualified hazardous duty area, the deadlines for taking actions withthe IRS are extended. The extension is for 180 consecutive daysafter the last day the military taxpayer was in a combat zone or qualifiedhazardous duty area or the last day of any continuous qualified hospitalizationfor injury from service in the combat zone or qualified hazardous duty area. Inaddition, the 180 days is also extended by the number of days that were leftfor the individual to take an action with the IRS whenthey entered a combat zone or qualified hazardous duty area.
Extension To Pay Tax When Not In a Combat Zone - A member of the Armed Forces may delay payment of incometax (but not the employee’s share of Social Security and Medicare taxes) thatbecomes due before or during military service. To qualify, the service membermust be performing “military service” AND notifythe IRS in writing that his or her ability to pay the income tax ismaterially affected by the military service.
If the IRS approves the request, the service member will be allowed upto 180 days after termination or release from military service to pay the tax.If the tax is paid in full by the end of the deferral period, no interest orpenalty will be charged for that period.
Home Mortgage Interest & Taxes - You can deduct qualified mortgage interest and realestate taxes as an itemized deduction, even if they are paid with nontaxablemilitary housing allowance pay. The home mortgage interest is, however, stillsubject to the general rules for deducting home mortgage interest.
Home Sale Gain Exclusion -Taxpayers are allowed to exclude $250,000 ($500,000 if filing a joint returnwith a spouse and both qualify) of gain from a home sale if it was owned andused as a principal residence for two of the five years prior to the sale. Thefollowing special rules apply to military personnel:
Reduced exclusion - If yousell your primary residence and do not meet the two-out-of-five-years ownershipand use tests due to a move to a new permanent duty station, you may qualifyfor a reduced maximum exclusion amount.
Extended test period - Youmay choose to suspend the 5-year test period for ownership and use during anyperiod you serve on qualified official extended duty. The period of suspensioncannot last more than 10 years and cannot be suspended for more than oneproperty at a time.
Uniform Deduction - If youitemize your deductions you can deduct the costs and upkeep of certain uniformsthat regulations prohibit you from wearing while off duty. However, you mustreduce your deduction by any reimbursement you receive for these costs.
Signing Joint Returns
- Both spouses normally must sign joint income tax returns.However, when one spouse is unavailable due to certain military duties orconditions, the other may, in some cases, sign for both spouses, or will need apower of attorney to file a joint return.
If you have questions related to these and other benefits provided to membersof the military, please call our office
[h=1]Franklin Katz, RTRP, ATP, PA, PB[/h][h=1]Frank's Tax & Business Service[/h][h=1]315 E. King St.[/h][h=1]Kings Mountain, NC 28086[/h][h=1]704-739-4039 [/h][h=1]E-Mail: [email protected])[/h][h=1]Web: www.prep.1040.com/frankstax[/h][h=1]IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.
[/h]
[h=1] [/h]