November 29, 2014 by Aaron Scott Young
The best type of income is tax-free income. Ordinarily, any rental income you receive is taxable. However, there is one little known exception that can be particularly useful this time of year.
You can rent out your vacation home for up to 14 days per year and all the rental income you receive is tax free, no matter how much you earn. In fact you don’t even have to report the income to the IRS. (IRC Sec. 280A(g).)
Example: Claudia rents her Florida beachfront condominium for 14 days during the summer. She lives in the condo herself for two months during the year. Her condo qualifies as a tax-free vacation home.
The vacation home qualifies as a tax-free vacation home because it was used personally more than 14 days and rented less than 15 days. This means Dick need not pay any income tax on the rental income he received. Had Dick rented it to the strangers for one more day, the house would have come within the vacation home used as residence category with very different tax results.
The tax deduction rules applicable to any personal vacation home or second home apply to vacation homes in this category. Under these rules, all your real estate taxes are deducted as a personal itemized deduction on your IRS Schedule A. Because the home is treated as a personal residence for tax purposes, you may not deduct any operating expenses for the property or take any depreciation deduction. You don’t file Schedule E, the tax form landlords file to report their income and expenses, because your home is not a rental property.