10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

How do you report the sale of a second residence?

Your second home is considered a capital asset. Use Form 1040, Schedule D (PDF) to report sales, exchanges, and other dispositions of capital assets.

11.3 Sale or Trade of Business, Depreciation, Rentals: Personal Use of Business Property (Condo, Timeshare, etc.)

I rent my home out for two weeks each year. Do I have to show the income on my return?

You must first consider if you use your dwelling as a home. You are considered to use a dwelling as a home if you use it for personal purposes during the tax year for more than the greater of 14 days or 10% of the total days it is rented to others at a fair rental price. It is possible that you will use more than one dwelling unit as a home during the year. For example, if you live in your main home for 11 months and in your vacation home for 30 days, your home is a dwelling unit and your vacation home is also a dwelling unit, unless you rent your vacation home to others at a fair rental value for more than 300 days during the year.

There is a special rule if you use a dwelling as a home and rent it for fewer than 15 days. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses. If you itemize your deduction on Form 1040, Schedule A (PDF), Itemized Deductions , you may be able to deduct mortgage interest, property taxes, and any casualty losses. For additional information, refer to Tax Topic 415, Renting Vacation Property/Renting to Relatives and Publication 527 , Residential Rental Property (including Rental of Vacation Homes) .

I am renting a house to my son and daughter-in-law. Can I claim rental expenses?

In general, if you receive income from the rental of a dwelling unit, such as a house, apartment, or duplex, there are certain expenses you may deduct.

Besides knowing which expenses may be deductible, it is important to understand potential limitations on the amounts of rental expenses that may be deducted in a tax year.

There are several types of limitations that may apply.

Passive Activity losses : In general, you can deduct passive activity losses only from passive activity income (a limit on loss deductions). You carry any excess loss forward to the following year or years until used, or until deducted in the year you dispose of your entire interest in the activity in a fully taxable transaction. There are several exceptions that may apply to the passive activity limitations. Refer to Publication 527 , Residential Rental Property and Publication 925 , Passive Activity and At-Risk Rules .

At risk rules: The at-risk rules limit your losses from most activities to your amount at risk in the activity. You treat any loss that is disallowed because of the at-risk limits as a deduction from the same activity in the next tax year. If your losses from an at-risk activity are allowed, they are subject to recapture in later years if your amount at risk is reduced below zero. Refer to Publication 925 , Passive Activity and At-Risk Rules.

Not for profit activities: If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Any rental expenses in excess of rental income cannot be carried forward to the next year. Refer to Publication 527 , Residential Rental Property and Publication 535 , Business Expenses .

Rental of a dwelling unit: The tax treatment of rental income and expenses for a dwelling unit that you also use for personal purposes (renting to a relative may be considered personal use even if they are paying you rent) depends on whether you use it as a home. Refer to Publication 527 , Residential Rental Property .

Expenses in connection with rental of a dwelling unit for less than 15 days per year . Refer to Publication 527 , Residential Rental Property .

Keyword: Vacation Home