Renting out your property? Know the tax rules

It's the middle of summer, and many homeowners may be getting ready to take a long vacation or open up a second home for a few months. Many individuals who spend their time at more than one property consider renting out their homes to make additional cash throughout the year. This is especially true for those who own property in tourist destinations and other high-traffic areas. According to Fox Business, the vacation-home industry has grown into a multibillion-dollar enterprise and can be particularly lucrative for homeowners.

However, the income earned from renting out a property may not be free money, and those who are leasing their homes to renters need to understand the tax implications of this action. Depending on the number of days that a property is rented out, owners may be entitled to tax benefits or pay some taxes to Uncle Sam for the business transaction.

There is a certain rule that should be followed by homeowners to determine their tax obligations, and it's commonly known as the 14-day or 10 percent rule.

Federal tax laws state that if a property is rented for up to 14 days each year, there is no need to report rental income because the property is still considered a personal residence. Keep in mind, however, that taxpayers cannot deduct home costs as rental expenses, and may only write-off those expenses allowable for a primary or second home.

On the other hand, if a property owner rents out a home for 15 or more days per year and uses the home as a personal residence for less than 14 days, the home is considered a rental property. In this case, all rental income must be reported to the IRS during filing season. However, there is a silver lining. Individuals who own rental property may deduct rental expenses on their taxes. These expenses include insurance premiums, home maintenance, mortgage interest, property taxes, utilities, depreciation and fees paid to a property manager.

In another scenario, owners who use a property for more than 14 days or 10 percent of the total days the home was rented - whichever is greater - may classify the property as a personal residence. This means that rental expenses may not be deducted.

Those who own homes that are occasionally used for rental purposes should consult their tax preparer to ensure they are filing correctly and avoid disputes with the IRS.

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