Rent is always taxable income. Right?
Not quite. While everybody else pays tax on all the rent they receive, there's a special break for homeowners who rent their homes for short periods. Congress created this break to prevent occasional short-term rentals by homeowners from becoming subject to a complicated set of deduction-limiting rules applicable when a home is used for both personal and rental purposes.
The Break. If you rent your home for less than fifteen days during the taxable year, the rental income you receive is not subject to tax. This special break does not prevent the deduction of your regular homeowner deductions, including real estate taxes and home mortgage interest. It's like temporarily turning your home into a tax-free municipal bond.
Practical Use For You. This homeowner's break can help any homeowner, but it's especially useful if you live where housing is in strong demand for short periods, such as south Florida or a ski resort in Vermont or Colorado. In these areas the two-week period from just before Christmas to New Year's is a prime time for the rental of your property- possibly at rates of $2,500 to $3,500 a week. You can rent your home for less than fifteen days during the year, taking advantage of temporary high rents, yet entirely avoid tax on the rental income.
This type of opportunity arises in numerous other locations, such as Indianapolis, for the Memorial Day races, Louisville, during Derby Week, and New Orleans, during Mardi Gras, and when cities like Atlanta or Los Angles host the Olympics.
Break Survives Attack. Tax reformers hate this tax break and repeatedly have tried to kill it. But legislators from states with big resort area constituencies linked up with the National Association of Realtors to beat back the attack. Other supporters of the break are congressional representatives from localities hosting mega-events, such as the big furniture shows in North Carolina, where short rentals of homes to event attendees can put big bucks in local homeowners' pockets.
While you don't have to report your rental income from the short-term rental, there is a restriction: you can't deduct any rental expenses. For example, if you have expenses for advertising your Florida condo or pay extra cleanup expenses after your guests depart, these expenses are not deductible.
Second Homes.This break also applies to second homes, such as a cabin retreat in the mountains or a condo in Manhattan.
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