Renting your home out when you're away isn't new. An uncle who was an out-of-state high school track coach for years made an annual pilgrimage to Des Moines for the Drake Relays. He always rented the same house South of Grand, and the owner conveniently went to Florida for Relays Week to spend that rent.
What is new are services like Airbnb and VRBO.com that match up travelers and folks willing to rent their home, or maybe a spare bedroom. They makes it easier to earn a little side money out of the most expensive asset most people have.
Such rentals also mean new tax issues for the hosts.
While the tax law may allow real estate operators to deduct losses attributable to their rental properties under the right circumstances, things are different for taxpayers leasing their homes.
A special code Section, Sec. 280A, strictly limits deductions from a "residence." If you rent out a “residence,” you can’t deduct rental losses beyond the amount of rent you receive.
Worse, you have to allocate the property taxes and mortgage interest that you can deduct anyway to the time the property is rented before you can deduct anything else — say, utilities or depreciation. If the amount of interest and taxes allocated to rental exceeds rental income, you’re done — your other expenses aren’t deductible.
What is a "residence," anyway? One California taxpayer logically noted in Tax Court that if he was renting out the whole house while he was away, he certainly was not "residing" there that particular moment, so he wasn't subject to the Sec. 280A limits on residential losses. Nice try, that.
Section 280A(d) has a specific definition of "residence":
(1) In general For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of—
(A) 14 days, or
(B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.
For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes.
So the computation is based on the use for the whole year. If you live in the house at least 10 percent of the number of days you rent it out during the year, or for at least 14 days if that's more than 10 percent of the rental days, it’s your residence, as far as the tax law is concerned. That means it applies to a lot of taxpayers with vacation homes.
Section 280A isn’t all bad news for taxpayers. It also provides that if you rent out a house for less than 15 days during the year, you don’t get to deduct any rental expenses, but you don’t have to include any rent you receive in income either.
Of course, the tax law isn't the only complication for would-be Airbnb hosts. West Des Moines strictly limits the ability of its residents to have paid house guests, and Waukee is considering similarly restrictions. That's too bad, as such restrictions needlessly interfere with the ability of homeowners to defray their ownership costs with rent-paying housesitters.