This is a potential hidden gem in the tax code if utilized properly.
Renting Your Home/Second Home Tax Free
There is a special rule: if you use a dwelling unit as a personal residence and rent it for fewer than 15 days, you do not need to report any of the rental income and likewise do not need to deduct any expenses as rental expenses. (Source: IRS Tax Topic 415.)
You are considered to be using a dwelling unit as a personal residence if you use it for personal purposes during the tax year for more than the greater of:
- 14 days, or
- 10% of the total days it is rented to others at a fair rental price. It is possible that you will use more than one dwelling unit as a personal residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a personal residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a personal residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year.
My analysis after a small amount of research is that this special rule can be utilized on the rental of a second home as long as the rules are met.
In simple terms, there are a number of ways that this special rule can be utilized:
The first is if you rent your home as a location for filming to an outside production company for no more than 14 days in a calendar year, the income can be excluded.
A second is you can rent out either your home or vacation home for up to 14 days a year and the income can be excluded. Many people are doing this through AirBnB. You can use the rental income and take your own vacation.
Thirdly, if you own a business and operate as a separate legal entity you can rent your home to your business. An example is your business can rent your home from you up to 14 days a year for client appreciation parties, staff appreciation parties, a holiday party, entertaining clients and even staff training sessions if more conducive than in an office or at a separate facility. The amount of rent paid must be arms-length (Fair Market Value). You can gets quotes from a local hotel or restaurant in writing and use them as a basis for the amount of rent paid.
Lastly, always consult with your tax professional as to your specific facts and circumstances.