Homeowners in Boerne and New Braunfels may want to consider lowering their tax liability through renting their home to visitors staying in town for popular local festivals. One of our newest tax staff accountants wrote an article for the Boerne Business Monthly on rental income tax. We are very happy to have Mark as part of our team and congratulate him in his upcoming wedding. Below is an excerpt from his article.
“Kendall, Hays, Williamson, and Comal County are all among the Nation’s fastest growing counties. Central Texas has seen a large increase in tourism, with San Antonio alone having approximately 31 million visitors each year. Many of these tourists explore surrounding areas such as New Braunfels and Boerne. Boerne’s festivals, including Berges Fest and Dickens on Main, attract thousands of visitors each year, as does Wurstfest in New Braunfels. With only a handful of hotels and bed & breakfasts, there are a limited number of vacancy’s during festival times. Websites such as AirBnB have become increasingly popular with tourists seeking short term stays with a local touch. This provides many homeowners with either a vacation home, an extra room, or even just a couch opportunities to make extra income while possibly lowering their tax liability. Of course, Uncle Sam has provided tax guidelines on rental income. Understanding these three basic home rental situations will ensure you optimize the rental benefit for your situation.
Short Term Rental Homes
Short term rental activities can provide some of the best benefits. If you rent your primary residence or vacation home for 14 days or fewer during the tax year, that income is Tax Free (IRS Publication 527). That’s right, Tax free! It doesn’t matter the amount of profit within those two weeks, you are not required to report this income. Another benefit is that it doesn’t matter if you rent out your vacation home or just your spare couch. This means that during major festivals, if you decide to leave town and avoid the congestion, you may lease out your primary residence or vacation home and have tax free income.
Full Term Rental Homes
Full time rental homes usually imply owning a second home or condo used for vacation or as an investment. The IRS treats these types of rental homes as investment property with certain tax guidelines. If your personal use of these homes are limited to no more than 14 days each year, or less than 10% of the time its rented, then that home or condo qualifies to be treated as an investment. The benefit of having a second rental property is that if it is successfully leased throughout the year, it may pay for itself with the possibility of having a profit and net cash flow. During Austin City Limits, some homes in Austin rent on average from $400-$1,100 a night. Rental income is 100% taxable. The most common rental expenses which may be deducted include Advertising, Repairs & Maintenance, Depreciation, Insurance, Interest, Taxes, Mortgage Interest, and Utilities. If your rental expenses exceed your rental income, you could possibly deduct these losses, under certain conditions. The IRS classifies Rental income as a passive activity. The IRS treatment for a passive activity means you can only offset passive income with passive losses and if passive losses exceed passive income, you cannot deduct those passive losses; however, they are carryforward to the next tax year. In certain situations, rental activities may not be classified as passive. But this requires material participation on your part, and a conversation with your tax advisor.
Hybrid Rental Homes…
There are monetary benefits to renting your primary residency or second home. As long as you follow IRS guidelines, there is little risk involved, unless of course you find rowdy tenants. Please always keep in mind to contact your CPA before making any investment decisions.”
Mark Blazek is a Tax Staff Accountant at Akin, Doherty, Klein & Feuge, P.C. (ADKF). ADKF is a full-service accounting firm with offices in San Antonio, Boerne, and New Braunfels. Mark graduated from San Houston Statue University and has over three years of public accounting experience. He has served six years in the Texas Army National Guard. Mark spends his free time fishing and hunting with his fiancé.