January 27, 2020
The Surprising Effectiveness of Vacation Rental Tax Shelters
Vacation rental owners can actually have the best tax shelters, saving them money in taxes every year.
So, what is a tax shelter? Does your property qualify as one? Let’s explore the specifics of vacation rental tax shelters and how they could be beneficial upon tax time.
What Are ‘Vacation Rental Tax Shelters’?
Tax breaks for rental homes are often referred to as vacation rental tax shelters, and can generate big returns. Taxation of a vacation rental home is contingent on the combination of personal and rental use. If your home is rented often enough to be considered a rental property, you can claim this income as a tax deduction. Real estate taxation can get complicated, with specific rules differentiating a rental property, vacation home, and residence. The IRS determines which category a given property belongs to based on the frequency it's used and why. If your property is rented for less than 14 days a year, income made from said property is typically tax-free. However, you'll pay taxes on property that's rented out for more than 14 days a year. Still, you’ll be able to deduct rental expenses from your taxes. This depends on how much you’ve personally used the home and rented it out. Let’s look at an example: Perhaps you’ve rented out your home for 100 days this year and personally used it for 20 days. You'd divide 100 (the number of days you rented your home) by 120 (the total number of days it was occupied). This will give you 83.3 percent total, which is the amount you can deduct from taxes. Therefore, you've earned 83.3 percent of qualifying expenses in this case.Ways Rental Properties Can Reduce Tax Burdens
Per the IRS, rental property expenses can be deducted from your rental income taxes. However, you should be careful about what you deduct to avoid common tax mistakes. Rental income is defined as “any payment you receive for the use or occupation or property." It must be reported for any and all rental properties. Looking for tax shelters? Here are some of the expenses you can deduct from your taxes as the owner of a rental property:- Mortgage interest
- Property tax
- Operating expenses
- Depreciation
- Repairs
- Ordinary and generally accepted maintenance expenses
Harnessing Depreciation
Depreciation is basically the loss of value due to age, overuse, and damage. It’s safe to say that the vast majority of properties depreciate in value over time if their features aren't maintained. Luckily, you can harness depreciation as a homeowner to save yourself money in the form of a tax deduction. As depreciation deductions occur over time, you can begin deducting as soon as your property starts being used as a rental. After all, the best tax shelters are those that have a payout over time. To calculate deductible depreciation, you can use the basis in your property, the determined recovery period, and chosen depreciation method. Here are some ways to determine whether your rental property is eligible for depreciation:- You own the rental property.
- The property is used to generate income.
- The useful life of the property can be determined.
- Your property is predicted to last over another year.