Renting out a second home can provide a variety of benefits for homeowners in the position to do so. However, there are also a variety of things to consider when you’re renting out your second space. When homeowners decide to make this change, many wonder what qualifies as a deduction when the property is vacant, including the time before it was an income property and in the future when (and if) there’s a lapse in tenants.
For a detailed look at all the ins and outs of rental properties, view our complete rental property tax guide here:
- Tax Forms For Reporting Rental Activity
- Best Entity For Rental Property Ownership
- Selling & Reporting Your Rental
- Taxable Vacation Home Rental Income
- How To Deduct Startup Expenses
- Home Office Deductions
- Personal Car & Public Transport Travel Expenses
- Depreciation Expenses
- Tax Deductible Rental Loss
- Non-deductible Expenses
- Tax Credits For Landlords
- LLCs For Real Estate Investments
To start with, yes, you can still deduct rental expenses when the home is unoccupied. There’s a small window of time where you’re able to deduct expenses. It’s important to know as the tax code can become complicated.
Allowed Rental Home Deductions
If the house is not being rented, there are still many deductions available. Maintenance and repairs are deductible. Additionally, marketing expenses for the rental are deductible as well.
Marketing costs include any expenses associated with renting out the home. This includes hiring a real estate company to manage the property even if there’s no tenant yet. Depreciation (i.e. the reduction of your home’s value over time) is also a deductible expense, no matter how much you’re making from the home at any given time.
How Long Can You Deduct Expenses from a Vacant Property?
If you have not received income from the property for some time, that doesn’t mean you need to stop deducting expenses from your tax filings. However, that doesn’t mean you’ll always be able to do so; there are a few instances where you’ll need to stop. One of the most prominent of these is if you start using the property as a holiday home during the year. The marketing expenses cannot be deducted during this time.
Rule of Thumb: If it’s Vacant, it’s Fair Game
A good rule of thumb to follow is: if the home is not occupied, you can deduct it. This means even if you have a relative staying at the place (rent-free), you cannot deduct that time. You can only deduct expenses from the rental property for any period of time when the home is 100% vacant. For another example, if you live on the premises between January and March, you will not be able to claim any deductions during that period. However on April 1, you can go right back to deducting as you normally would.
Should you live in the property for a certain portion of the year and have it available for rent for the rest, then you’ll need to divide the potential deductions accordingly. In the example above, for instance, you could be living in the home for 25% of the year. This means you’re able to claim 75% of the rental deductions that would have otherwise been available.
This is what’s known as ‘personal time’ in the property and can be broken up into any time during the year and may have to be planned in advance for tax purposes. It should also be noted that, should this personal time be canceled for any reason, then you’ll need to put it up for rent immediately to begin claiming the deductions.
Frequently Asked Questions
Can you write off rental property expenses?
Yes, and we go into more detail here, but you can deduct rental expenses, operating expenses, and repairs.
Is vacancy loss an expense?
No. If your income property was vacant (or rented for a limited time) and spent the rest of the year vacant, you cannot deduct the vacancy as a loss of income. Typically, you are able to deduct the necessary expenses to maintain the property, including depreciation.
Can you depreciate rental property that is not rented?
Yes, if the property is available to be rented, then improvements you make, appliances with limited shelf life, and some marketing materials (such as ‘For Rent’ sign that may need to be replaced) are depreciable.
For more information, you can always contact a qualified CPA.
As a seasoned expert in real estate and tax matters, I bring years of hands-on experience and in-depth knowledge to guide homeowners through the intricacies of renting out a second home and understanding the associated tax implications. Over the years, I've assisted numerous clients in optimizing their rental property investments while ensuring compliance with the ever-evolving tax code.
Now, let's delve into the concepts mentioned in the article:
-
Tax Forms For Reporting Rental Activity:
- Homeowners renting out a second property need to be familiar with the specific tax forms required for reporting rental activity. Common forms include Schedule E, where rental income and expenses are reported.
-
Best Entity For Rental Property Ownership:
- The article suggests exploring the best entity for owning rental properties. This involves understanding the advantages and disadvantages of different ownership structures, such as owning the property personally or through a legal entity like an LLC.
-
Selling & Reporting Your Rental:
- When selling a rental property, homeowners must report the transaction and understand the tax implications. This may involve reporting capital gains and any depreciation recapture.
-
Taxable Vacation Home Rental Income:
- The article touches on the taxation of rental income from vacation homes. Understanding the tax rules for vacation home rentals is crucial for accurate reporting and compliance.
-
How To Deduct Startup Expenses:
- Homeowners should be aware of the deductibility of startup expenses related to renting out a property. This could include initial repairs, marketing costs, and other expenses incurred when preparing the property for rental.
-
Home Office Deductions:
- For homeowners using part of their second home as a home office, understanding the rules and limitations of home office deductions is important.
-
Personal Car & Public Transport Travel Expenses:
- If homeowners incur transportation expenses related to managing their rental property, the article suggests that understanding the deductibility of these expenses is crucial.
-
Depreciation Expenses:
- The article emphasizes the deductibility of depreciation expenses, which represent the reduction in the property's value over time. Homeowners should track and claim depreciation on their rental property.
-
Tax Deductible Rental Loss:
- Homeowners need to comprehend the concept of tax-deductible rental losses, understanding when and how they can offset rental income with expenses to reduce their overall tax liability.
-
Non-deductible Expenses:
- Certain expenses may not be deductible, and homeowners should be aware of these to accurately calculate their taxable rental income.
-
Tax Credits For Landlords:
- The article hints at the availability of tax credits for landlords. Exploring and leveraging these credits can have a significant impact on a homeowner's overall tax situation.
-
LLCs For Real Estate Investments:
- The article suggests the consideration of forming an LLC for real estate investments. Understanding the benefits and implications of this legal structure is crucial for asset protection and tax planning.
In conclusion, navigating the tax landscape of renting out a second home requires a nuanced understanding of these concepts. Homeowners should stay informed, keep detailed records, and, when in doubt, seek the advice of a qualified CPA to ensure compliance and maximize their financial benefits.
