Got a home in a tourist destination? A cash windfall and a few tax breaks could be yours this summer.
Though it's only May, a number of locales are becoming standouts for summer travel.
In particular, the number of bookings to Rosarito, Mexico, are up 548% year over year, while reservations to short-term rentals in Destin, Florida, have increased by 419% from 2018, according to Airbnb.
A home with the right details will command a hefty price tag — and a fine bit of income for the owner.
For instance, a two-bedroom apartment with beach views in Destin is going for $206 a night, Airbnb found.
While the prospect of a side income is attractive, homeowners hoping to rent their properties have to navigate the tax code. That's where things get tricky.
About 1 in 7 homeowners polled by Vacasa, a vacation rental company, said that they didn't know what they need to submit on tax forms as rental owners.
The company polled 1,006 individuals who own their primary residence and earn income from renting one of their properties.
"From a tax perspective, it's important to understand how the home is classified: Is this a personal residence or a rental property?" asked Robert Westley, CPA and a member of the American Institute of CPAs' personal financial specialist credential committee.
Whether your home is primarily a residence or a rental will depend on how often you use it.
If you're using your beach house for personal purposes for the greater of 14 days or 10% of the total days you rent it to others, then the IRS considers the dwelling a residence.
Further, if you're using the abode as a residence and you rent it for no more than 14 days, you don't have to report the rental income to Uncle Sam.
Though this can be a great deal if you rent your home during popular seasonal events, you should also know that you can't deduct any of the rental expenses.
"You can get a good amount of rental income in a short period of time," said Westley.
Get to know your state and local tax rules on vacation rentals, said Paul Garza, tax accountant for Vacasa. You may be subject to licensing requirements, as well as sales or lodging taxes.
Maybe you only use your lake house once in a while.
In other words, you're renting it to others for more than 14 days and you use it yourself for no more than 14 days.
In this case, you would pay income taxes on the money you earn from collecting rent, and you would be able to write off your expenses from that activity.
Just make sure that you keep complete financial records and that you maintain a log of when you're renting the dwelling and when you're using it.
"You have to allocate the expenses attributable to personal use versus rental use," said Westley.
When the time comes to file your taxes, you can report income and expenses related to your rental on Schedule E.
Before you rent your dwelling, particularly if it's your vacation home, contact your lender.
"Are there any clauses in the loan that say that if you're going to rent part of your residence that the lender might have a problem with it?" asked Troy Lewis, CPA and managing member of Lewis & Associates CPAs.
You should also contact the provider of your homeowner's insurance policy to ensure you're still covered.
Some carriers may require that you add a rider to your policy if you're renting your primary dwelling for a short period.
If you're renting your beach house to vacationers on a regular basis, you'll want to consider a landlord policy.
Landlord insurance not only covers your dwelling and your personal property that's available for tenant use, but also provides liability protection in case a tenant is injured on your property.