With the recent emergence of sites like Airbnb and HomeAway, taxpayers have taken advantage of renting out their homes to help with the burden of housing costs. This extra income is great, but can create a little bit of a tax nightmare! You must now prepare a special schedule to report the rental income (called a Schedule E) and report all your income and deductions to the IRS. What makes it a little more complicated is the fact that you now have to add the value of your home to a depreciation schedule and begin to depreciate the percentage of your home that used as a rental property. What most taxpayers don’t know is that there is a way that they can rent their homes and not have to claim any income!
The IRS has a special section in the tax code for someone who owns a home residence and rents the home for less than 15 days. In this section is says, “If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and…You are not required to report the rental income and rental expenses from this activity.” The code specifically says that you don’t have to report the income from renting your home for less than 15 days.
I recently saw a return come through our office where the taxpayer rented their home for 15 days! Doh! If they would have rented it one less day the income would have been completely excluded and not reportable on the tax return.
Like we talked about earlier, if you own a corporation (like many of our clients), you are required to have board meetings. Every state is different on how often these board meetings should be, but as a rule of thumb, these meetings need to occur regularly. If you decide to have these meetings at your home, be sure to use the fair market rental rate for hosting such meetings. You can call a local hotel and get a quote to see how much it would cost to rent a conference room for 1 day. That quote can serve as a guide on how much you should pay yourself in rent.
If you own a practice but are not organized as a corporation (LLC or sole proprietor), you may still benefit from this deduction. Instead of board meetings, you can have office meetings at your house. Again, call a local hotel to get a quote on much you should charge yourself for rent.
Regardless of your legal entity, be sure to record notes about what transpired during the meeting. Store these notes in a safe place with the rest of your accounting records. If you are ever questioned by the IRS on the validity of the meeting, your notes will serve as proof that it was a legitimate meeting.
Many doctors also host the annual Christmas Party and other office events at their home. These would also qualify a rental activities. If you also prepare the food, you can charge the market rate for what it would cost to purchase similar food from a local restaurant. Use the same guidelines as you would for the business meetings when determining how much to pay in rent.