Personal Finance

If you rent out your vacation house, don't forget to give the IRS a cut

Key Points
  • Generally speaking, renting out your house (or a room) for 14 days or fewer in a year is tax-free. However, you also don't get to deduct expenses incurred from the rental.
  • The new tax law creates a 20 percent deduction for pass-through business income, which means part-time landlords could qualify for the tax break.
  • Expenses such as repairs, mortgage interest, property taxes and utilities are deductible on a prorated basis that's tied to the number of days you rented out the property.

With the summer travel season heating up, many vacation-home owners get to look forward to some extra income from renting out their slice of paradise.

These part-time landlords need to remember that in many cases, the Internal Revenue Service expects to hear about that extra cash.

Generally speaking, if you rent your vacation home for fewer than 14 days out of the year, the income you earn is tax-free.

Emile Wamsteker | Bloomberg | Getty Images

"In that event, you don't get any deductions, but you also don't pay tax on the income," said Stephen Fishman, author of "Tax Guide for Short-Term Rentals."

If your rental days are above the 14-day threshold, you need to report the income. The good news is that you also get some tax breaks to reduce the amount you pay taxes on.

For starters, the new tax law that took effect this year allows a 20 percent deduction for so-called pass-through businesses. For the vast majority of people who rent their property, income from that activity is "passed through" to the owner's (or owners') individual tax return.

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This means there's a chance you could qualify for that 20 percent write-off on net rental income, as long your total income is below $157,500 ($315,000 for married couples who file joint tax returns). The deduction starts phasing out at that level and disappears altogether for incomes above $207,500 ($415,000 for joint filers).

However, consult with a tax advisor before assuming you qualify for that 20 percent break.

You also get to deduct a variety of expenses related to your rental activity. Costs such as local licensing, fees you pay to online platforms, advertising and marketing are all associated business costs that could be deductible.

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Other expenses — repairs, mortgage interest, property taxes, utilities — are deductible on a prorated basis tied to the number of days you rented your home out.

For example, if you rent your house for 20 percent of the year, or 73 days, you can deduct 20 percent of expenses related to the house (i.e., utilities).

Some part-time landlords might just rent a room in their home instead of a whole house. In that case, the same expenses are deductible, but to a lesser degree.

If you ever get audited, they can check your bank records and other records. The evidence is there.
Stephen Fishman
Author of "Tax Guide for Short-Term Rentals"

Say the room takes up 25 percent of the space in your home. You could deduct 25 percent of expenses allocated to those days. (Using the example above: You could deduct a quarter of that 20 percent total.)

Fishman cautions that while it might be tempting to avoid reporting your rental income to the IRS, you're breaking the law if you don't.

"If you ever get audited, they can check your bank records and other records," Fishman said. "The evidence is there."