Vacation Homes Offer Tax-Free Income and a Business Deduction.
Did you know the Internal Revenue Code allows for you to earn tax-free rental income on your vacation home? The general rule is that if you rent your property for 14 days or less per calendar year, then the expenses that are not otherwise deductible are considered personal non-deductible expenses. So you can’t take a deduction for utilities, insurance, or maintenance. What is great about the general rule is that the rental income earned for the 14 days or less is Tax-Free!! So the requirement is that you not rent out your vacation home for more than 14 days in a calendar year. As long as you follow this rule, the IRS doesn’t even want to know about it!!
A couple of other guidelines: use a reasonable daily rental rate which should be comparable to other daily rental rates in the area of your home; and document, document, document. Document how you established the daily rental rate, document the days you rented the vacation home and to whom, preferably in a calendar, and document with a receipt for the payment received.
Business Owners Can Doubly Benefit
As a business owner, you should be having regular board meetings, recording decisions in the form of minutes and spending time in strategic planning through business planning, tax planning, and establishing a marketing calendar and campaigns.
Since these are all businesslike functions you could rent your vacation home for these meetings and pay yourself the daily rental rate, which you receive tax-free for personal income tax purposes, as long as you follow the rule stated above. This daily rental fee becomes a business deduction for your business.
Remember to document, document, document because you need to establish the business nexus. You should document the reason the business is renting the home outside your normal business location – you want to avoid interruptions and a change in venue provides for more focused and productive meetings. Document the number of days rented in your business calendar and you should document the type of meeting and the agenda for the meeting, along with other attendees. Again, prove the reasonableness of the daily rental fee by asking for a quote from a local rental agent. And don’t forget to provide a receipt to the business.
Oh and this same approach can be used for your personal residence, not jut a vacation home.