The Wall Street Journal
27 March 2018
The new tax law brought welcome news for people who rent out their homes for short periods. And it likely will entice even more people to do it.
To be sure, the tax rules are complicated and the Internal Revenue Service and the Treasury Department haven’t issued the final regulations yet. But here are some ways short-term landlords could benefit:
The new tax law caps state and local income-tax and property-tax deductions at a total of $10,000; previously there was no limit. But there may be a way around this new cap for people who rent out their home or vacation property for at least 15 days a year, tax experts say.
Here’s how it might work in practice, according to Stephen Fishman, a legal writer and author of several Nolo do-it-yourself legal guides, including one on short-term rentals.
Let’s say you pay $1,000 a month in property tax ($12,000 a year) on a home. Under the new rule, if you live in the home all year, you’re only entitled to a $10,000 deduction. But say you rent it out for three months. You can deduct 25% of your property tax, or $3,000, on Schedule E for rental deductions and income. You can then deduct the other $9,000 you pay in property taxes on Schedule A for itemized deductions, allowing you to deduct the full amount of your property tax, Mr. Fishman says.
If you’re in the top bracket of 37%, the difference in the amount you could deduct in this example would result in a tax saving of $740, Mr. Fishman says. If you’re in the 32% bracket, it would be a saving of $640, and it would be a saving of $480 in taxes if you’re in the 24% bracket, he says. “It’s not a gigantic amount. But it is an additional savings that you would not otherwise have, and that will probably encourage people even more to do short-term rentals.”
The new law also caps mortgage-interest deductions for first and second homes purchased during 2018 through 2025. Under the new tax plan, you can only deduct mortgage interest on loans of up to $750,000 over that eight-year-period; the previous limit was $1 million.
However, “a rental property does not fall under those rules,” says Robert Gilman, a partner at New York-based accounting firm Anchin, Block & Anchin LLP. “On a rental property, you could have a mortgage of $10 million and deduct the full amount of the interest.”
“If the property is part rental and part residence, you can deduct the mortgage interest without limitation for the period of time that it’s a rental property—provided it rented for 15 or more days,” Mr. Gilman says.
Again, let’s use an example, courtesy of Mr. Fishman. Say you have a $1 million mortgage on a home you bought in 2018 on which you pay $60,000 interest annually. Only interest on loan amounts up to $750,000 is deductible, so you can only deduct 75% of that $60,000 as an itemized deduction on Schedule A, or $45,000. If you rent the home for three months, or 25% of the year, you can deduct 25% of your mortgage interest, or $15,000, as a rental expense, not subject to the $750,000 limit. You get a $15,000 deduction on Schedule E, allowing you to deduct the full amount of your mortgage interest.
You can’t double dip, though, so if you claim a deduction on Schedule A, make sure you don’t also claim it on Schedule E and vice versa, Mr. Fishman says.
If you’re in the top 37% bracket, the tax saving from the difference in the amount you could deduct in the example above would be $5,550, Mr. Fishman says. If you’re in the 32% bracket, it would be a saving of $4,800; it would be a saving of $3,600 if you’re in the 24% bracket, he says.
Another benefit for owners renting out their homes is that the new law makes it easier than ever to deduct in a single year the cost of personal property like furniture or appliances used by renters, Mr. Fishman says.
Say you buy furniture or appliances for your home rental property. You can now deduct 100% of your tax basis (the cost times the percentage of the year the property is rented) in one year for purchases made during 2018 through 2022. In the past, you had to deduct the cost of the property over five or seven years, depending on the item—and all the items had to be new. Now they can be used as well, Mr. Fishman says.
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