Renting out your vacation home? Know the tax implications
If you’re fortunate enough to own a vacation home, you may want to rent it out when you’re not using it. But how might that affect your taxes?
The answer lies in keeping good records. Before you post the “for rent” sign, consider how many days you, your relatives (even if they pay market rent) and nonrelatives use the home if market rent isn’t charged.
Under 15 days
In the right circumstances, renting the property out can produce revenue and significant tax benefits. If the property is rented out for less than 15 days during the year, it’s not treated as “rental property,” and the rent you collect isn’t included in your taxable income at all. On the other hand, you can only deduct (as itemized deductions) property taxes and mortgage interest — no other operating costs or depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)
If you rent the property out for more than 14 days, you must include the rent received in income. However, you can deduct part of your operating expenses and depreciation, subject to certain rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, 75% of the use is rental (90 out of 120 total use days).
You may allocate to rental 75% of your costs such as maintenance, utilities and insurance, plus 75% of your depreciation allowance, interest and taxes for the property. The personal use portion of taxes is separately deductible as an itemized deduction. The personal use part of interest on a second home is also deductible (if eligible) where the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.
Claiming a loss
If the expenses exceed the income, you may be able to claim a rental loss (subject to the passive activity rules), depending on how many days you use the house for personal purposes. Here’s the test: If you use it personally for more than the greater of 14 days or 10% of the rental days, you’re using it “too much” and can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t create a loss. Deductions you can’t use are carried forward and may be usable in future years. If you’re limited to using deductions only up to the rental income amount, you must use the deductions allocated to the rental portion in this order: 1) interest and taxes, 2) operating costs 3) depreciation.
If you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive” and may be limited under passive loss rules.)
These are the basic rules. There may be other rules if you’re considered a small landlord or real estate professional. Contact us if you have questions. We can help plan your vacation home use to achieve optimal tax results.
Check kiting is no small matter
A check kiting scheme relies on “float” time, which is the period between when a check is deposited and when the bank collects the funds on the check. Some banks accept check deposits and release funds immediately, in the interest of good customer service. That’s similar to providing accountholders with interest-free loans.
In recent years, the float time has narrowed, but there’s still opportunity to capitalize on that delay and some unethical businesses take advantage of that time. Check kiting schemes typically involve two or more banks, though some schemes can involve multiple accounts at one bank if there’s a lag in how the institution processes checks. The perpetrator’s goal is to falsely inflate the balance of a checking account so that written checks that otherwise would bounce, clear.
Strategies for grounding the kite
Check kiting is a federal crime that can lead to up to 30 years in federal prison, plus hefty fines. Even if a bank doesn’t press charges, it may close the account and report the incident to ChexSystems (similar to a credit bureau), making it difficult to open a new business account.
Here are five strategies your organization can implement to keep people from using your company’s accounts for check kiting:
- Educate employees about bank fraud. Describe the types of transactions that qualify as bank fraud and their red flags. That makes workers aware of suspicious activities and demonstrates management’s commitment to preventing fraud.
- Rotate key accounting roles. Segregate accounting duties. Rotate tasks among staffers if possible to help uncover ongoing schemes and limit opportunities to steal.
- Reconcile bank accounts daily. Make sure someone trustworthy, who isn’t involved in issuing payments, reconciles every company bank account.
- Maintain control of paper checks. Store blank checks in a locked cabinet or safe and periodically inventory the blank check stock. Also limit who’s allowed to order new ones.
- Go digital. The most effective way to prevent most check fraud is to stop using paper checks altogether. Consider replacing them with ACH payments or another form of electronic payments.
Check kiting is relatively easy to perpetrate, particularly if your company isn’t vigilant about its check stock and bank account activity. For help tightening your internal controls, contact us.
Beware of “wash sales” when selling securities
If you’re planning to sell capital assets at a loss to offset gains you realized during the year, beware of the “wash sale” rule. Under this tax rule, selling stock or securities for a loss and buying back substantially identical stock shares or securities within 30 days before or after the sale date means the loss can’t be claimed for tax purposes.
The wash sale rule is designed to prevent taxpayers from benefiting from a loss without actually parting with ownership. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in dividend reinvestment plans, the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)
Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock to increase its tax basis for future disposition. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).
Assume you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 5 for $3,000. On November 29, you buy 500 shares of XYZ again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.
If only a portion of the stock sold is repurchased, only that portion of the loss is disallowed. In the example above, if 60% of the shares sold were bought back, you’d be able to claim 40% of the loss on the sale. The remaining loss would be disallowed and added to your cost of the repurchased shares.
The wash sale rule can deliver a nasty surprise at tax time. Contact us with questions.
Talking about the “sandwich generation”
The term “sandwich generation” was originally coined to describe baby boomers caught between caring for their aging parents and their children. These days the term applies to whichever generation is grappling with the problem. If you’re in the middle of the sandwich, it may be time for some honest discussions with the other parties about pressing issues.
It’s a good idea to start the talks with the “bottom” of the sandwich: your children. Assuming they’re still in their formative years, make them your top priority. At this stage, you’ll still have most of the control over decisions that affect their lives. These involve personal choices that are different for every family.
The “top” half of the sandwich can be more problematic. Depending on their health status, finances and other factors, your parents may not welcome assistance. They may be dismissive of your concerns and may display attitudes ranging from cooperative to highly resistant.
To initiate a family meeting, invite all the key players — your parents, siblings, their spouses if appropriate and, possibly, others. Generally, it’s best to hold such a meeting face-to-face. But if distance or other factors make this unrealistic, an online video chat might work as well.
What should you discuss? Cover the entire tax and financial planning gamut. The dialogue should be frank and honest. Many issues can be sensitive and emotions may run high. So be prepared for some handwringing or pushback.
You may find that one session isn’t enough to accomplish your objectives. In fact, you might discover a need to include additional family members to resolve the issues. You may even want to broaden the circle to include your CPA or attorney.
October 17 – Personal federal income tax returns for 2021 that received an automatic extension must be filed today and any tax, interest and penalties due must be paid.
- The Financial Crimes Enforcement Network (FinCEN) Form 114 “Report of Foreign Bank and Financial Accounts” (also known as the “FBAR”) must be filed by today, if not filed already, for offshore bank account reporting. (This report received an automatic extension to today if not filed by the original due date of April 18th.)
- If an extension was obtained, calendar-year C corporations should file their 2021 Form 1120 by this date.
- If the monthly deposit rule applies, employers must deposit the tax for payments in September for Social Security, Medicare, withheld income tax and nonpayroll withholding.
October 31 – Employers must file Form 941 for the third quarter (November 10 if all taxes are deposited in full and on time). Also, employers must deposit FUTA taxes owed through September if the liability is more than $500.
November 15 – If an extension was obtained, calendar-year tax exempt organizations should file their 2021 returns. If the monthly deposit rule applies, employers must deposit the tax for payments in October for Social Security, Medicare, withheld income tax and nonpayroll withholding.
December 15 – Fourth quarter 2022 estimated tax payments are due for calendar-year corporations. If the monthly deposit rule applies, employers must deposit the tax for payments in November for Social Security, Medicare, withheld income tax and nonpayroll withholding.
About Batley CPA
Batley CPA, LLC is a full-service CPA firm providing tax, accounting, payroll and advisory services to businesses and individuals throughout Green Bay and the Fox Cities. Batley CPA regularly provides clients with best practices and strategies to maximize cash flow, profit, reduce taxes, manage costs and risk, and bring meaning to financial and operational data. The company has offices in Appleton, Neenah and Green Bay.