Tom Kelly: Part-time, full-time rental income rules differ

It’s the time of year for weddings in faraway churches and family reunions in relaxing places. Perhaps friends (or friends of friends) have approached you about renting your home or vacation cabin when you are not using it this year. And, they are willing to pay – an amount in line with the best rental properties in the area.

Do you have to declare the income to the Internal Revenue Service on your annual income tax return? How much is too much before crossing into a different tax threshold?

While many families don’t charge a fee for letting friends use their home or getaway retreat for a special gathering (hoping they’ll return the favor when YOUR daughter gets married), you can pocket any fair-market rent as long as the term is 15 days or fewer and you don’t claim any of the tax deductions typically allowed on rental property, such as for depreciation or maintenance.

This option can come in handy for folks who do not want to be in the rental game yet occasionally find they could rent their place. It happens all the time for annual golf tournaments, arts fairs, theater festivals, auto races and jazz carnivals.

The rules change, however, if the getaway house becomes a designated rental or investment property. Under current federal tax laws, the owner can still use a rental vacation home for 14 days or 10 percent of the amount of time the house is rented, whichever is greater, without jeopardizing its status as a rental property and tax shelter.

The owner who designates his cabin as an investment property and rents “full time” is getting a couple of benefits: First, the renters are buying the house for him – somebody else’s money is paying off the mortgage. Second, he can depreciate the building – not the property it stands on – which can provide substantial tax benefits.

Depreciating an asset means you are taking a deduction for the value lost as an asset ages. According to the firm of Ernst & Young, the period of time over which you depreciate your property has long been the subject of controversy. It often depends on when the property was put “in service.”

Investors in vacation homes must use the tax benefits from depreciation to cover their costs. What is left for them is profit made from the appreciation in the value of the property.

The 14-day maximum-personal-use rule means a house at the ocean with a 90-day rental season can be owner-occupied for 14 days, instead of the nine days that would be allowed under the 10 percent rule. With longer rental seasons, however, the 10 percent rule can be a bonus.

For example, a mountain resort home near winter ski slopes and summer lakes might be rented for 250 days a year, allowing the owner to use it for 25 days. Personal use does come at a cost. Depreciation is limited only to the percentage of time that a house is rented. If you rented for 90 days and use it yourself for 10, you can take only 90 percent of the total expenses and depreciation.

But another way to catch a few hours at the beach without eating into or exceeding the 14-day or 10 percent limit is to clean the house yourself between renters. Days spent maintaining the house do not count toward the personal-use limit. And you can deduct travel costs to get to the house and expenses such as paint and cleaning supplies.

However, if the IRS determines you were at the house more to sit in the sun than to clean the bathrooms and paint the porch, those days may be added to your personal use and could jeopardize your tax savings.

The house also must be rented at fair-market value. If you rent to relatives at discount rates, the IRS may rule the house is not actual rental property and disallow many of your deductions.