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This Legal Loophole Lets You Rent Out Your House (or Room) Without Paying Taxes
People pay big bucks to rent a house for a week or two in the right season or during events. Maybe you've considered using your own home (or vacation home) as a short-term rental, but you aren't thrilled about the accounting required or the taxes you'll pay.
Guess what? It’s perfectly legal to rent out your home and pocket thousands of dollars without paying taxes on the income.
That's right: the IRS makes it very clear that if you rent out your home for 14 or fewer days each year, you do not have to report the income. This is also true of your cabin, condo or any second home you own. As long as you use it yourself for at least 14 days per year or 10% of the time you rent it out to others, it is considered your residence. You can then rent it out for up to 14 days per year without reporting the income.
How Much Tax-Free Income Can You Make?
If you have a cabin near Asheville, North Carolina, you might rent it out for about $250 per night for two weeks of the fall “color season,” and pocket that $3,500 without paying a dime in taxes. If you live in downtown San Francisco you might get $2,000 per week and make $4,000, tax free.
In many areas, to get the highest rent from your home you'll have to time the rental properly. Here are some examples of times you can charge more:
- Winter in Florida
- Summer (especially for cabins) in northern states
- During big festivals and other events anywhere
- Ski season in Colorado or Vermont
- Spring in Utah if you live near biking trails
- Fall color season in the Northeast
You get the idea; just think about when the hotels fill up where you live. And if you have another place to stay, you can rent out both homes for two weeks and you still don't have to report the income. And since you already pay most of the expenses anyhow (mortgage payment, property taxes, utilities), the income is almost pure profit.
How to Be a Part-Time Landlord
You can list your home on a vacation rental website, but if you want to keep your costs down, start with a free listing on Craigslist. If you know anyone else who has rented out their home on a daily or weekly basis, ask where they get the best results from advertising.
You could also use a local vacation rental agent. Be sure you know what they charge, and that you only pay a fee when your home is successfully rented. Getting help can be a good idea the first time, so you get a feel for how to prepare your home and how to screen potential renters.
Where do you stay when renting out your home? If you have a second home, there's no problem. Otherwise, you can time a vacation to coincide with the rental period. Maybe the rent will even cover the whole cost of your trip.
You also could also move in with family for a while or let your brother-in-law know you'll be taking him up on that longstanding offer to use his cabin on the lake. If you have (or can borrow) an RV, you can go camping for two weeks.
There is another option, which is to stay in your home and just rent out a room for a couple of weeks. If there is a big event in town that fills all the hotel rooms, you might get $100 per night.
You can use Airbnb to rent out a room. Many of the site users are looking for lower-priced accommodations, but if everything is full, they may just have to pay your price.
Rent Your Home and Reduce Your Tax Bill
Tax-free income is nice, but collecting income while lowering your taxes is perhaps even better. Turbo Tax points out that if you rent out your second home for more than 14 days, making it a rental in the eyes of the IRS, you can use it to create a paper loss to lower your tax bill.
Suppose you own a cabin that you use for a month each year, and you also rent it out for a month in the fall. You report the income, but since personal and rental use is split evenly (unoccupied days don't count), you can allocate 50% of all expenses to the rental activity. If your rental income is $2,400 and half of the expenses come to $4,000, you have a paper “loss” of $1,600.
That loss can offset other investment income or, if you're actively involved in the rental, even regular income. In other words, if you're in the 28% tax bracket, you could collect $2,400 and pay $448 less at tax time.
Tax-free income or even tax-reducing income: two solid reasons to consider renting out your home.
Your Turn: Would you consider renting out your home by the day or week to make some tax-free income?