Tax Free Renting of Your Primary Home

Tax Free Renting of Your Primary Home

In the U.S. tax code, a little-known provision allows homeowners to rent out their principal residence or second home for up to 14 days a year without having to use that money as income. But the taxpayer cannot deduct any rental expenses associated with this income.

You can earn as much as you want with no restrictions. If your primary or second home is in a desirable area where there is a demand for short-term rentals, this could create a windfall for you.

Think about cities where big sporting events happen like championships. A temporary rental market could exist. For events like PGA tournaments, college basketball tournaments, bowl games, NFL playoffs, or other large events can create a demand for these short-term rentals.

As an example, people in Augusta, Georgia will rent their homes during the Master’s Golf Tournament each year. There are not enough hotel rooms to accommodate the large number of spectators who usually attend in non-pandemic years and the homes will fetch a nice daily rate.

Do not be confused about the different types of properties and what constitutes a home. The original intended use and the actual use will usually determine the type of property.

But we can talk about the four types of property here. Your principal residence is the home you live in. Income property you rent but do not live in. Investment property is held for an increase in value. And finally, inventory which is related to a business, like homes that are built or renovated to be flipped.

We generally use second homes for our enjoyment which is in addition to our primary home. Taxpayers can deduct mortgage interest and property taxes on first and second homes up to a specific limit. What we call a vacation home is a good example of a second home. A rental property could be a vacation home that is rented during the year.

I suggest you check with your insurance agent about your current policy to see if temporary rentals are covered. Make sure to ask about liability in case someone is injured in your home. The coverage conversation might help you decide if you want to go this route or not.

For more information, see IRS facts about renting out a residential property at irs.gov or consult your tax professional.

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