Do you own a vacation home (or year-round home, for that matter) near annual events where rents soar for short periods – for instance, Indianapolis for the Memorial Day weekend race; Louisville, Kentucky, during Derby week; and Augusta, Georgia, during its Masters golf tournament? With the blessings of the IRS, you can rent out your home, pocket the rent checks, and sidestep taxes on the rental income.
Just make sure to rent out your cottage or condo for less than 15 days during the year, and you don’t have to declare any of the income you receive. But go beyond the less-than-15-days limit and all the rental income becomes reportable on Form 1040’s Schedule E. Carefully review the rules; the tax collectors can be sticky.
Congress curtails a different break for vacation-home owners. The law allows individuals who sell their principal residence (year-round home) to escape taxes on a profit of as much as $500,000 for married persons filing jointly and $250,000 for single persons and married persons filing separate returns. To qualify for the exclusion, they must own and use the dwelling as a principal residence for at least two years out of the five-year period that ends on the sale date.
Prior law allowed them to claim an exclusion, then occupy a vacation dwelling for two years and qualify for another exclusion. Legislation that took effect at the start of 2009 limits the amount of the exclusion when a second home becomes the principal residence. In the case of sales after 2008, the new rules prohibit any exclusion for post-2008 periods of “nonqualified use” – IRS lingo for periods during which the former second home wasn’t used as a principal residence.
Losses on home sales. While the housing market is buoyant in many parts of the country, it remains depressed in some places. Many people face the prospect of losing money when they try to unload their personal residences.
The tax code has always prohibited write-offs for such losses. It treats them as nondeductible personal expenditures. Also, disregard mortgage debts when determining gain or loss on a home sale.
The IRS and the courts make no allowances for extenuating circumstances. For example, the IRS issued a ruling that prohibits a write-off for a loss caused by a doctor-recommended move from a two-story to a one-story residence to allow a youngster the maximum use of her wheelchair.
The IRS couldn’t care less that a homeowner is out-of-pocket because a job relocation triggered by a layoff, illness, death, divorce, or the like compelled a sudden sale before a home appreciated sufficiently to offset a realtor’s commission, an attorney’s fee, and other outlays involved in buying and selling.
Contact us today and let us help you minimize your tax liabilities!