Renting Your Tax Residence
Sentinel Events in the Life of a Tax Home: Part 1
Have you ever thought about renting out your home, or part of your home, while you are away on travel assignments? If so, you’ll want to consider how that can affect your taxes.
In the last two articles we discussed the one year limit to “temporary” status and the ways in which frequent/repetitive visits to the same assignment location can shift a tax home. In addition to the one-year rule, there are other situations that are tax home “killers.” Renting out your residence can be one.
One of the requirements of maintaining a tax home is that the traveler must have significant expenses in maintaining their “principal residence.” When one rents out their home, the expenses of keeping the home are offset by the rental income. With the current state of the housing market, the offsetting income might not seem to be such a luxury if it only covers the mortgage and the taxpayer still considers their residual expenses “significant.” However, the fact that in only covers part of the cost of the home is not the reason renting a home kills the tax residence.
When one rents their home, it is no longer their “principal residence.” It is now someone else’s principal residence; it’s the use that matters, not the income.
However, there are two situations in which renting a home is not fatal to the tax residence: a partial rental and a vacation rental.
Partial rental:
When I was in college, I bought a three-bedroom townhome and rented out the other two bedrooms to friends. Since I was still using the residence as my home, if I had decided to travel, the dwelling could still function as my tax residence. I still had significant expenses for my portion of the dwelling, but just as important, I used it as my dwelling. A partial rental can take different forms. Instead of a bedroom split, some homes have distinctly separate dwellings on different floors and some are like duplexes.
Vacation rental:
A vacation rental is acceptable if the number of days that the dwelling is rented is kept at a minimum. For instance, renting out a condo in a ski resort during the winter and using it as a residence the remaining seasons is a workable plan. Though there are no tax court cases that have tested the vacation rental of a residence for a traveler, a rented residence is still considered the taxpayer’s primary residence if they occupy the dwelling more than 10% of the rented days. If this approach is applied, then the taxpayer can theoretically rent the home for 332 days, use it as their residence for 33 days and it will still be considered their principal residence. The problem with renting the residence to the nth degree for multiple years is that it shows a pattern of abandonment which the IRS could easily consider a forfeiture of a tax residence in an audit.
In the next installments, we’ll explore other sentinel events in a tax residence. Keep your incident reports handy.
About the author:
Joseph Smith is an IRS enrolled agent (EA) with a master’s in taxation, and a former travel respiratory therapist whose firm, TravelTax, provides tax preparation and audit representation for the mobile professional.
Related article:
Enjoy Your New Home but Don’t Forget the One-Year Rule (The One-Year Rule: Part 1)
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