$30,000! That’s what several home-owners who live relatively close to Chambers Bay Golf Course are getting as the world prepares for the US Open Championship.
The event can send the message that some rental tax breaks work especially well for retirees. The relevant tax break: anyone, not just retirees, can rent a home (primary residence) for up to 14 days every year without owing income tax. Retirees aren’t tethered to jobs, so they have more flexibility to leave their home to high-paying renters on the right dates. If you’re still working, pull a “John Daly” and sleep in the car outside your employer. Kidding, not my recommendation. But you get the point.
You can rent your primary residence or your second home. But you have to clear some hurdles to qualify for tax-free income. Most important, you must rent the home for no more than 14 days during the year.
If you go over by even one day, tax-free treatment will vanish. If you have a vacation home, the home is treated as a residence in any tax year in which the owner’s use of the unit for personal purposes exceeds the longer of (1) 14 days or (2) 10% of the period of rental use. So watch out.
For example: Mr. and Mrs. Shank use their home, overlooking the Puget Sound, twenty-nine days a year. The home usually rents for 300 days a year. Therefore, the house will be treated as rental property for tax purposes, and deductions attributable to rental use may be allowed. Phase-outs, taxes, passive/active participation, and AGI all factor in at that point.
The IRS says you must use the dwelling unit as a home. Again, you’ll pass this test if the home is used “personally” for the longer of 15 days or ten percent of the rental period to others in a calendar year. It doesn’t matter how much income you have or how much you collect. Abide by these rules and you’re home tax-free.
In some cases, these short-term rentals can bring in thousands of dollars and there are plenty of homes up for grabs this June. There’s no Social Security or Medicare tax due on rental income. You don’t even have to report the income from these short-term rentals.
So the cash flow won’t show up on your adjusted gross income (AGI). Holding down AGI offers multiple tax advantages. For retirees, it can mean less tax on Social Security benefits.
Even better, regular residence tax benefits are not affected. So you can continue to deduct mortgage interest and property tax payments for the home involved.
Whether you advertise yourself or use an agent, check into any special requirements for short term rentals. Some areas fine homeowners who rent their homes without a permit. And your home insurer might require special coverage.
Get rental payment upfront, along with an adequate security deposit. Damages do happen and will eat into the amount received as rent, quickly.
Tickets for the US Open have pretty much sold out already, and so the demand is there for homeowners who would like to take advantage of this tax-free income. Let us know if there are concerns or questions pertaining to the assets you own, and how we might suggest ways to make them work better for you.
Senior VP, Portfolio Manager
Phone: (503) 619-7237