Basically, 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.
You use the property yourself and rent it when you're not there.
Second Home as Full-Time Rental
You used to enjoy spending all your free time at your beach house, but now that the kids are grown and gone, you and your spouse have found other ways to vacation. So you've decided to lease out the vacation home more than you use it.
Of course, since taxes are involved, you must meet some specific requirements to take tax advantage of your rental vacation property. 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.
Of course, that rental income is taxable. But you also can deduct many costs associated with your rented second home.
Common Rental Expenses
The Internal Revenue Service says the most common rental expenses are:
Auto and travel expenses.
Cleaning and maintenance.
Legal and other professional fees.
Local transportation expenses.
Property management fees.
When your deductible rental expenses exceed your rental income, you could wipe out any possible taxable income and even record losses that could help additionally at tax time.
Passive activity pitfalls
Your rental losses, however, could be limited. The IRS usually considers rental real estate as a passive activity; that is, you get income mainly for the use of property rather than for services provided.
And the tax code's passive activity rules mean that generally you can only use passive losses to offset passive income, not ordinary income such as wages. Any excess passive losses are carried forward to the next tax year.
There is one way to get around passive activity rules. If you are an active participant in your rental vacation home up to $25,000 of the home's expenses beyond the rental income could be deductible. There are income restrictions and a phaseout of this amount. If you make more than $100,000 ($50,000 if married filing separately), your deductible allowance is limited.
What constitutes active participation? You're deemed to have materially participated in a rental property if you (or your spouse) were involved in its operations on a regular, continuous and substantial basis during the tax year. This includes such things as personally maintaining the property and lining up renters.