If you’re looking for more income, why not let your other home help you out? You may have been using it just for yourself, but now you need more income. If you turn it into an investment property you’ll not only bring in some income but increase your tax breaks for holding it.
Many of you have a second home. It could be a vacation condo or you may have moved into your vacation condo and you’re first home has become your second one which you’re visiting less as time goes on. If you want more income, put that second home to work for you – at least a little.
The IRS will recognize your other home as an investment if you rent it out more than 14 days per year and restrict your personal use of it to either 14 days or less, or 10% of the days you rent it – whichever is more. In that case you can treat it as a rental property so you can deduct all your rental expenses subject to the passive loss rules.
Passive loss rules restrict your annual rental loss to the extent of its rental income. But if your adjusted gross income (AGI) is $100,000 or less, you’re allowed to claim rental losses of up to $25,000 each year. In that case your rental losses can exceed your rental income and begin sheltering other personal income you have. This ‘allowed loss’ is phased out as your AGI increases from $100,000 to $150,000.
*Your rental expenses now are deductible:
Rental expenses include all your Schedule E expenses for that property. These expenses include advertizing, annual maintenance costs, mortgage interest, property taxes, and also depreciation. Your annual depreciation deduction is simply a bookkeeping amount specified by the IRS. It doesn’t take any cash out of your pocket like the other expenses do. But, as a deduction, it helps to reduce the income tax you’d have to pay on the rental’s income – and perhaps other income.
It’s nice if you can earn a lot of rental income. But many times, it doesn’t take much rental income to cover your yearly out-of-pocket expenses to maintain your rental. In this case all your cash expenses combined with your annual depreciation can exceed your rental income to produce a net ‘allowed’ loss on your real estate investment for that year. In that case you can use that loss to offset your personal income – if you’re AGI is low enough as mentioned above. For retirees that means offsetting income taxes on your pension or your IRA distributions.
The depreciation loss that shelters your personal income from tax while you’re getting rental income that covers ‘out-of-pocket’ expense is a real help to you. And remember, you get to use your rental for some ‘free’ vacation use for a couple of weeks each year, too.
*Still want to use your other property more?:
If you don’t make it an investment property, you really only have mortgage interest and property tax deductions you can take on it. And those generally require you to itemize your deductions.
But if that’s OK with you, realize you can still rent it, but for only 14 days per year. And here’s the tax break – you can keep whatever rental income you get for those 14 days tax free.
If you rent it for more than 14 days and your personal use is also more than 14 days or 10% of the rental days, then you can deduct some additional but limited expenses (including depreciation) but only up to the extent of rental income your receive – and claim on your return.
Shane Flait helps you with your financial legal, tax, and retirement goals.
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