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Home Rentals: Avoid Tax Trap for Personal Use

If you own a personal residence that you rent out most of the year, you are generally entitled to deduct expenses attributable to the rental property, including depreciation, maintenance, mortgage interest, property taxes and insurance. In fact, you may even be able to claim a tax loss on the deal.

However, deductions for rental property are limited to the amount of your rental income if your personal use exceeds the greater of 14 days or 10% of the time the home is rented out. In other words, you cannot claim a tax loss. Similarly, you avoid any restrictions under the passive activity loss rules if you pass the personal use test.

New case: A physician operated a bed-and-breakfast from his personal residence. But he allowed his daughter and her family to live there for an unspecified period of time. Then he claimed rental income of only $650 and expenses of around $19,000. Result: Because the daughter was not charged a fair rental for the stay, her use counts toward the physician's personal use. Therefore, the physician failed the tax law test for personal use.

It is important to stay within the tax law boundaries during the course of the year. We can help you avoid any complications in this area.

 

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