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Tilting the Scales Business Issues with a Legal Slant

Do I Owe Income Taxes When I Rent Out My Home?

Posted in Money, Property Issues

Home for RentOver the summer, Brad Bevos’ company relocated him from Austin to Springfield, Illinois. A University of Texas alum and huge Longhorn football fan, the move bummed Brad because he won’t be able to attend home games this season.  Because hotels are scarce during home game weekends, and other special events at UT, Brad decides to list his downtown Austin apartment for rent on VRBO instead of selling it.  Brad manages to rent the apartment for 12 nights during the season for $2,400.   Brad doesn’t include this income on his tax return, and when he gets audited the IRS finds out about his side business.  Is Brad in trouble?

Issues to Look Out for When Renting Your Home

Many people now rent out their homes on VRBO or Airbnb websites to make extra income. Before entering the rental industry it’s best to understand how renting will affect your:

  1. income taxes;
  2. local taxes (do you owe hotel occupancy taxes?);
  3. property taxes (do I keep my homestead exemption?);
  4. homeowner’s insurance (does my policy cover me for tenants?); and
  5. whether you are complying with your HOA’s rules.

Do you owe the IRS?

It depends on how often you rent out your home during the year. The IRS has an exception – dubbed by some as the Master Exception for homeowners who rented out their Augusta homes during the Masters golf tournament – that permits you not to report rental income if:

  1. you rented the home for 14 days or less during the year; and
  2. you used the property yourself for 14 days or more during the year, or for more than 10% of the total days it is rented.You may be able to deduct some of your expenses to offset your rental income, so discuss with your tax advisor.

Does Brad owe the IRS?

No, because Brad rented out the house for less than 14 days, and he had lived there for more than 14 days before he was relocated. But, Brad will likely owe income taxes in future years if he rents for more than 14 days, or didn’t visit Austin for at least 14 days.

Tilting the Scales in Your Favor

Before getting into the rental business make sure you have a full understanding of the financial implications. If you are renting out a second home, you should consider hiring a rental management company who can handle day-to-day issues that arise, such as maintenance.