Renting out your house or apartment, or even a room in your home, may seem an easy way to make some money or help pay for your summer vacation now that online rental hubs make it simple to market your property.
But it’s worth learning about the tax rules that may apply to avoid costly surprises next April.
To keep things simple, consider limiting the number of days you rent your home, or a room in your home, to no more than 14 a year. If you rent out your home for fewer than 15 days, you don’t have to pay federal income tax on the money you earn.
In fact, you don’t even have to report the income to the Internal Revenue Service, said Jonah Gruda, senior tax manager with WeiserMazars in New York.
It doesn’t matter if you make $400, $4,000 or more; the money is tax-free. At least, it’s free of federal income tax. More later on other types of taxes that may apply.
The tax exemption – one of the rare times you can earn money and not pay any income tax on it – is called the “Masters” rule by some because it is used by those who rent out their houses in Augusta, Georgia, during the professional golf tournament.
But it can benefit anyone living near a major event, like the Super Bowl or the Kentucky Derby. This summer, those with homes near the major political conventions – to be held in Cleveland for the Republicans, and Philadelphia for the Democrats – could potentially reap a rental windfall.
The 14 days don’t have to be consecutive, said Bob Meighan, the vice president of customer advocacy for TurboTax. So you don’t necessarily need to live near a large, one-time event to take advantage of the exemption.
You can also rent for a day or two here and there and pay no taxes, as long as the total is fewer than 15 days.
“It is one of the best tax benefits available, for those who know about it,” Meighan said.
Here are some questions and answers about tax rules when renting your home:
Q: If I rent my home for 14 days or less, can I deduct any expenses I incur?
You can’t deduct direct costs, like utilities, that result from the rental, Gruda said. But if you usually take a deduction for home mortgage interest and property taxes, you can continue to take that on your tax return.
Q: What if I rent out my home for 15 days or more?
Once you exceed the 14-day limit – even if it’s just by one day – the two-week exemption goes away. All the money you made must be reported and will be subjected to income tax. “There’s no give or take on that one,” Meighan said.
In that case, however, you can reduce the tax you owe by deducting related rental expenses, like cleaning fees, repairs and the like, said Amy Wang, senior technical manager for tax advocacy at the American Institute of CPAs.
Since the rental is now considered a business, both the income and the deductions would be reported on Schedule E. “It can be complex,” she said, so “keep good records of all your expenses.”
Q: Do I have to pay local taxes on money I earn by renting my home?
Short-term rentals – typically, those of 30 days or fewer – are often subject to state and local lodging or “transient occupancy” taxes. You may have to pay these taxes, usually based on a percentage of the rental fee, even if you don’t owe income taxes.
Check with your local, county or state government to see what rules apply in your area.