You can exclude rental income from your tax returns. You just need to have mixed-use property or property that’s used for both rental and personal purposes. If you have a beach house or a ski lodge, then you’re going to want to pay attention.
How can I exclude rental income from my tax returns?
There are three scenarios in which you can exclude rental income from your tax returns, and they all deal with how long you rent your property relative to how long you use it personally.
Rental Property Income
- The number of rental days is greater than 15.
- The number of personal use days is less than
- 14 days, or
- 10% of rental days if more than 14.
Rental Income Made from a Residential Property
- The number of rental days is greater than 15.
- The number of personal use days is greater than
- 14 days, or
- 10% of rental days if more than 14.
Rental Income Made from a Residential Property That You Don’t Need to Report
- The number of rental days is less than 15 days.
How many days do I have to rent a property for it to be considered a residential property?
Your property is considered a rental property if you rent it for more than 15 days during the course of one year. That is, so long as personal use is either less than 14 days, or less than 10% of the total number of rented days if it’s used for personal use for more than 14 days.
So, if you rented the property for 300 days, so long as you used it personally for under 30 days the property is considered a rental property.
Your rental income will be reported in full. Allocated rental expenses are calculated by dividing the total number of days the property was rented by the sum of the number of days the property was used as a rental property and a personal property. Vacancies are excluded.
Expenses are deducted in the following order:
- Mortgage interest and property taxes
- All operating expenses
- Depreciation
Losses subject to passive activity limitations can be deducted because this is a rental property.
How can I exclude rental income made from a residential property?
Your property is considered a residential property if you rent it for more than 15 days during the course of one year, but occupy it for personal use for more than 14 days, or more than 10% of the total number of rented days if it’s occupied for personal use for more than 14 days.
So, if you rent your property out for 300 days, but occupy it as personal property for 60 days, then it’s considered a residential property.
The rental income is reported in full, and the rental expenses are deducted in the same order as if it were a rental property. Losses subject to passive activity limitations cannot be deducted because it’s a residential property. The allocated rental expenses are calculated by dividing the rental days by 365. Vacancies are included.
Mortgage interest and real estate taxes that count toward the property’s personal use will be deduced using Schedule A because the property is a residence. That means you can deduct more operating expenses against the rental income.
When can I skip reporting rental income made from a residential property?
If your property is rented for under 15 days it’s considered a residential property, but any rental income doesn’t have to be reported on your tax return. There’s no limit to the amount of income you can make, and no expenses or deductions have to be allocated toward the rental days. You can make $100,00 in 14 days and it’ll all be tax-free income.
How can I make the most out of being able to exclude rental income from my tax returns?
Keep this info in mind when you’re looking at properties in the most landlord-friendly states and states with zero property taxes. Your rental properties in states like Florida or Colorado can help you reap an extra reward while you occupy your property for personal use.
This can also save you more money when combined with a 1031 Exchange and Section 121 Exclusion. If personal use is a determining factor in owning this rental property, then when you sell the property you can use the profits to get a property that’s of equal or greater value using a 1031 Exchange. And if you’ve used your rental property for personal use enough time during the five years before you sell it, then you can exclude upwards of $250,000 (if single) or $500,000 (if married filing jointly) on the sale of your property. The 1031 Exchange entails a time crunch, so you may have to resort to buying a property using an assignment of contract from a wholesaler.
Bottom Line
What it comes down to is how long you’ve lived in your property relative to how long you’ve rented it. Live on it too much and it’s residential property; live on under a certain amount and it’s a rental property. And if you rent a residential property just right, you don’t have to pay any taxes at all!
