Tax Strategy: Charge freeloading family members rent on your vacation home

Do you use a vacation home personally and rent it out for part of the year? The tax rules are tricky.

Strategy: Charge your relatives a rental fee when they stay there. Otherwise, their “personal use” of the home could cost you valuable tax dollars. It all has to do with the limits on tax losses for vacation homes.

Here’s the whole story: As a landlord, you can generally deduct expenses attributable to a rental property, such as repairs, mortgage insurance, maintenance, property taxes and depreciation. However, if your personal use of the home exceeds the greater of 14 days or 10% of the time the home is rented out, your deductions are limited to the amount of your rental income. In other words, you can’t claim an overall tax loss if your personal use exceeds the 14 days/10% limit. And it’s not just your immediate family’s use that counts as personal use. Time spent at the home by freeloading relatives and friends is treated as personal use and could push you over the limit. If it’s a close call, charge friends and family a reasonable amount for using the home. According to at least one case, the rental fee can be discounted from the regular rate paid by other tenants under certain circumstances.

Tip: The Tax Court allowed a 20% reduction for rental to a relative because the owner saved on upkeep and maintenance. (Bondsell, TC Memo 1983- 411)