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If you own a home that you rent out, but also use personally, you may be able to take certain tax deductions if it qualifies as a rental property.
To qualify as a rental property, you must rent the home out for at least 14 days throughout the year, and you must not use the home for personal use for more than 14 days or 10 percent of the days it was rented for the year.
If your vacation home falls under these guidelines, the following applies.
Schedule E Losses and the PAL Rules
If you rent the home out, yet your expenses are greater than your income, you can claim a deductible tax loss on Schedule E on your tax returns.
However, there’s a catch.
You’re limited on the amount of passive losses you can take unless they are offset with other positive passive income earnings. If you can’t use your deduction this year, though, you can carry it forward, you don’t lose it. You can use it in a year that you have positive passive income elsewhere or when you sell the property.
The Exception to the Rule
There’s one exception to the rule. If you’re a ‘small landlord,’ and have an adjusted gross income of $100,000 or less, you can deduct up to $25,000 of real estate losses as long as you actively participated in the rental.
But of course, there’s another catch.
The $250,000 exception isn’t allowed if you rent the property out for 7 days or less or if the home is rented out for less than 30 days and the owner (or someone on behalf of the owner) provides personal services to make the property available.
Real Estate Professionals Getting Around PAL Rules
Real estate professionals are able to get around the PAL rules, taking their full deduction of a passive loss if they meet the following:
- Actively participate in the rental property at least 750 hours a year
- You must work the rental property at least half of the hours you work your regular job
Also, if you own more than one rental property and you materially participate in all of them, you don’t have to worry about the passive losses, as your earnings are considered non-passive and completely deductible.
Proving you Materially Participate
It’s important that you prove you materially participate in your vacation home rental. Basically, this means proving you do the work on the property, and you spend at least 100 hours on the property (and no one else does). As long as you don’t use a property management company, you can combine the time you and your spouse spend on the property to meet the requirements.
If you’d like to learn more about how your rental property could provide you with tax deductions, contact us today.