Should You Rent Your Second Home? Tax Breaks & Pitfalls to Consider

Owning a vacation home could net you some extra money if you rent it out when you're not there, but if you aren’t careful, it could generate some tax troubles.

Simply stated, the amount of time you personally spend at your second home determines how much tax you might owe on rent, as well as deductions you can claim against the property.

There are three basic second-home tax situations: you rent the property to others most of the year, you rent the property to others for a very short time or you use the property yourself and rent it when you're not there.

You must meet some specific requirements to take tax advantage of your rental vacation   

If you limit your personal use of your second home to 14 or fewer days (or 10 percent of the time it's rented) you've essentially turned your second home into an investment.

property.

“Nearly half of the people who finance their vacation homes are able to cover 75 percent or more of their mortgage by renting it out to travelers,” says Jon Gray, senior vice president, Americas, at HomeAway, an online vacation rental marketplace.

You can also deduct many costs associated with your rented second home.  When your deductible rental expenses exceed your rental income, you could wipe out any possible taxable income and even record losses that could help at tax time, however, your rental losses could be limited. 

The best tax deal is for short-term rentals, where your property is rented for 14 or fewer days. Money received for two-week-or-less rentals is tax-free.

Remember, as with everything regarding taxes, meticulous record keeping is of key importance.

To read the entire article, please visit www.finance.yahoo.com.