Consider the Tax Consequences of Mixing Business and Pleasure (1)

With the warm summer months beginning, the travel bug is starting to creep up. Individuals who travel for business and pleasure and own multiple residences should keep a few tax considerations in mind.

Income tax is one of the biggest aspects of deciding whether and how to rent primary or non-primary properties. Rental income is generally considered passive unless you meet the high standard of real estate professional classification, and passive losses usually may not be deducted in excess of passive income.

A workaround to help avoid the real estate professional standard is to rent to guests for periods that average seven days or fewer over the year. If you materially participate in renting the property, the rental shouldn’t be deemed a passive activity. These rental losses can be deducted as they are incurred.

In addition to general income tax deductions, the 14-day rule can be applied. If you rent out your main property for 14 days or fewer and you spend at least 14 days there, the rental income and expenses aren’t reportable on the owner’s tax return or subject to income tax. This strategy can be lucrative if you live in a popular vacation area and are willing to leave home for a couple of weeks in peak season.

Using this rule for secondary residences is a popular way to offset some of the costs of owning a second property. If you use the property for more than the greater of 14 days or 10% of the total days that you rent it to others, then you’ll be subject to the vacation home rules that limit your tax deductions.

You generally must divide your total home expenses between rental and personal use based on the number of days used for each purpose. If expenses exceed income, you can’t deduct the loss, but you may be able to carry the excess expenses forward to be deducted against the following year’s rental income.

The Fine Print of Renting

Navigating the laws on rental properties can be tricky. Here are some top nuances.

• If you stay at your home for more than the 14-day/10% limits, the home is considered a personal residence, and deductions are limited to rental income.
• If your personal use of the rental property falls below those limits, your home is considered a rental property subject to rental income tax rules. You may have the opportunity to rent it for short durations without running into the same rental income tax rules that apply to longer-term rentals.
• Be careful when renting to related parties and renting for less than fair rental value—both can have unexpected adverse tax consequences.
• Personal use is defined broadly and includes days you didn’t use the property yourself.
• Days spent maintaining the property substantially full-time don’t count as personal use days, even if you or your family members also use it for recreational purposes on the same day.
• Be wary of providing hotel-like services to short-term renters. If you offer daily maid service and laundry service as part of the rent, your rental would be considered a business and subject to self-employment tax.
• Look into neighborhood and local restrictions on short-term rentals such as permits and licensing; occupancy, hotel, and sales taxes; and other requirements for short-term rentals in your area.

Combining Work and Personal Trips

Mixing work and pleasure can offer the best of both worlds when it comes to traveling. Personal vacations may double as business trips, or you can work during personal travel. Self-employed people can deduct travel expenses and all expenses related to the business portion of the trip.

This only applies when business is the primary purpose of the trip, however. When family or friends accompany you, you can deduct the cost of what you would have spent to travel alone—even if they share a car ride or hotel room you would have used for yourself.

If you’re an employee of a business, you don’t receive direct tax benefits for travel. Your company might have negotiated hotel rates and travel policies that allow you to enjoy discounted rates before or after the business portion of your trip.

If you plan to work outside your resident state, be aware that nonresident states may seek to tax the income you earn while working there. Rules are different and generally more favorable for combining international business travel and pleasure for no more than seven days or when less than 25% of the time is spent on personal activities.

Remember these business trip and rental property advantages when planning your summer this year, and talk to your tax adviser before making any final decisions.

(Correction: Removes inaccurate characterization of percentage of rental days in fourth paragraph.)

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Marci Spivey is a tax partner and the family wealth taxation leader for Cherry Bekaert. In this role, she oversees the firm’s approach to serving the unique tax management and consulting needs of wealthy families and high earners.

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