With the Republican National Convention quickly approaching, visitors searching for temporary lodging will be flooding the Cleveland real estate market in the next few months. Hotels in the Downtown Cleveland market are becoming booked as approximately 50,000 delegates, media and convention planners prepare for the July 18-21, 2016 event. A good number of them will need to reside in Cleveland months in advance of the convention. Many will search for nearby residences to rent.
With home rentals already listing for $10,000 and up for one week, you may be asking yourself whether you should list your house for rental. Before you hop online or call AirBNB or Zillow to list your home, you first may want to think about the tax consequences of renting your home. And it all comes down to the number 15.
15 or Under
The U.S. tax code clearly spells it out: “If a homeowner rents out his or her personal residence for 15 days or fewer during the calendar year, the rent received is not reported as income on his or her tax return.” That’s it! It’s not often you can find a tax-free windfall. However, keep in mind, you will not be able to deduct any expenses associated with the rental, though you still can deduct your mortgage interest and real estate taxes to the extent allowed as an itemized deduction on Schedule A of your tax forms.
More than 15
So, let’s get back to those visitors who want to make Cleveland their home for more than two weeks. From a tax perspective, it’s a different story altogether. No more tax-free windfall.
When you consider a longer term lease, you’ll need to take a look at rental expense deductions to figure out how much of the taxable rental income can be reduced. For example, what if the additional income slides you right into a higher tax rate? All of a sudden that extra income might not look so great.
For leases that are more than 15 days, you’ll need to report the income on Schedule E of your tax return as ordinary income. However, the IRS is generous with the deductions allowed to offset rental income, such as mortgage interest and insurance, maintenance and advertising.
But here’s where it gets a bit more complicated. If the homeowner rents out a personal residence, different limitations will apply to these deductions. The homeowner must allocate expenses based on how many days out of the year the residence is used for personal use and how many days it is rented out.
To help you determine whether you should rent out your home to RNC Convention visitors, or for any other reason, here are six recommended steps to take:
- Consult with your tax advisor as each homeowner’s situation is different. If you decide to move forward, you’ll want to maximize your cash flow in the most tax-advantaged way.
- You’ll also want to consult with an attorney to obtain the necessary documents, such as a lease agreement.
- Review your condominium or homeowners’ association agreement to make sure you are allowed to lease your home.
- Review your homeowner’s insurance policy to ensure you have appropriate coverage,
- Make plans to secure valuables, preferably outside the home.
- Call your real estate agent for advice.