Skip to main content

Rent your home tax free



There is a little-known provision in the tax code that allows homeowners to rent their principal residence or second home for up to 14 days a year without having to recognize the income.  In this situation, the taxpayer does not deduct the rental expenses associated with the income.

There is no restriction on how much you earn.  If your first or second home is in a desirable area where people are looking for short-term rentals, it could provide a windfall to the homeowner.

In cities where any big sports championships are played, there could be a market for a temporary rental of a home.  Events like PGA tournaments, college basketball tournaments, Bowl games, NFL playoffs and others can create a demand for this type of rental.

For instance, there are people in Augusta, Georgia who rent their homes during the Master's Golf Tournament each year.  There are not a lot of hotel rooms in the area relative to the number of people who usually attend in non-pandemic years and the homes can fetch a nice daily rate.

There can be confusion about the different types of properties and what constitutes a home.  The intended use coupled with actual experience will usually determine the type of property.

There are four types of property.  A principal residence is the home you live in.  There is income property that you rent and do not live in.  There is investment property that is primarily held for an increase in value.  And, there is inventory, which is related to your business like homes that are built or purchased to be flipped.

A second home is one that is used for the primary enjoyment of the owner in addition to their principal residence.  Taxpayers are allowed to deduct the mortgage interest and property taxes on a first and second home up to specific limits.  A vacation home could be another name for a second home but more accurately, it is a rental property that has more than 14 days of personal use during the year.  It becomes a hybrid.

You might want to check with your insurance agent to see if your current policy covers temporary rentals, including liability in case of an accident involving personal injury.  This could affect your decision as to whether you want to consider the rental.

For more information, see IRS facts about renting out a residential property or consult your tax professional.

Comments

Post a Comment

Popular posts from this blog

Cash-Out Refinance

With the rapid appreciation that homes have had in the last two years, most homeowners have equity.   A common way to release part of the equity is to cash-out refinance but some homeowners may not be eligible currently. This type of loan replaces the current mortgage by paying it off and an additional amount of cash for the owner.   Generally, lenders will consider a new mortgage up to a total of 80% of the current value. Typically, the rate on a cash-out refinance will be slightly higher than a traditional purchase money mortgage.   As is in any lending situation, the rate depends on the borrower's credit and income.   The best interest rates are available to borrowers with higher credit scores, usually over 740. Loan-to-value can affect the rate a borrower pays also.   A 70% loan-to-value mortgage could be expected to have a lower interest rate than an 80% LTV because there is a larger amount of equity remaining in the property and therefore, less risk ...
Post a Comment
Read more

Make Your Home Offer the Most Appealing

Sales in February 2023 were up 14.5% month over month and still down 22.6% year over year according to the NAR Housing Snapshot.   The median sales price dipped 0.2% to $363,000 and there are 2.6 months supply of homes on the market compared to 1.7 months a year ago. "Inventory levels are still at historic lows, and consequently, multiple offers are returning on a good number of properties." According to Lawrence Yun, Chief Economist for the National Association of REALTORS�. It is still important to have a strategy for potentially competing with other buyers on the house you want to buy.   The plan should include several available provisions and options, so that at the time of drafting the sales offer, you can consider exactly what to include based on the situation. Unless a person is paying cash, you need to be pre-approved by a trusted mortgage professional long before you start looking at homes.   Include the written pre-approval letter along ...
Post a Comment
Read more

Not Available for All Buyers

Lenders regularly publish mortgage rates but they may not be available for all buyers. Imagine that the mortgage payment based on an advertised rate influenced a buyer to make an offer on a home. After negotiating a binding contract, this buyer makes a loan application and finds out that for any number of possible reasons, that rate isn’t available. Even if the person does financially qualify for a loan at a higher interest rate, it will not be the payment that the buyer expected when the contract was negotiated. Lenders evaluate several factors such as the borrower’s credit score, debt-to-income and loan-to-value ratios. These variables are used to assess the risk associated with the repayment of the loan. While mortgage money is a commodity, it isn’t priced the same way items are that involve cash for goods. The lender puts up the money today based on a promise from the borrower to repay over a long term, possibly up to thirty years. The simple solution ...
Post a Comment
Read more