Here’s how renting out your home while you take a two-month vacation interacts with your ability to use the $500,000 home-sale exclusion ($250,000 if single).
Remember, you have to use the home as a home for two of the five years before sale to qualify for the home-sale exclusion.
The tax code allows you to exclude from gross income up to $500,000 of gain (joint return, $250,000 if single) from the sale or exchange of your home if
- during the five-year period ending on the date of the sale or exchange
- such property has been owned by you or your spouse for periods aggregating two years or more and
- used by both you and your spouse as your principal residence for periods aggregating two years or more.
Planning note. The ownership and use periods do not have to be the same.
Here’s what the IRS said in an example that fits the vacation activity:
Taxpayer E purchases a house on February 1, 1998, that he uses as his principal residence. During 1998 and 1999, E leaves his residence for a two-month summer vacation.
E sells the house on March 1, 2000.
Although, in the five-year period preceding the date of sale, the total time E used his residence is less than two years (21 months), the section 121 exclusion will apply to the gain from the sale of the residence because, under paragraph (c)(2) of this section, the two-month vacations are short temporary absences and are counted as periods of use in determining whether E used the residence for the requisite period.
To summarize, E was living in the house for 21 months and on vacation for four months, giving him a total of 25 months. To take advantage of the $500,000 home-sale exclusion, E had to use the home for 24 months or more. The IRS says he meets the 24-month rule because his vacation time counts as use of the home as a home.
Your home is going to be a home under the vacation-home rules when you use it as your home for a number of days that exceeds the greater of
- 14 days, or
- 10 percent of the number of days during such year for which such unit is rented at a fair rental.
Example. You rent the home for 60 days and live in it for 305 days. Your home is a home under the vacation-home rules because your personal use is greater than 14 days and greater than six days (60 x 10 percent).
At the end of the year, you need to tally the rents you received and allocate the home expenses to the rental based on the ratio of rental days to personal days.
If you have a tax loss on the rental part, it’s not deductible against other income, but all is not lost. The law allows you to carry over any losses to the next tax year, when they again become available against your home-rental activity.
If you have a situation or expect a situation that involves the renting of your home while you are on a one- to two-month vacation and want my insights, please call me on my direct line at 973-339-7773.