Most income you receive is taxable income that is reported to the federal and state tax authorities. However, renting out your home or vacation property on a short-term basis can be done tax-free if you follow the rules.
The rule: If you receive rental income for less than 15 days per year, that income is generally not taxable income.
Added benefit: In addition to tax-free rental income, you may still deduct your mortgage interest expense and property taxes as itemized deductions. Neither of these tax benefits is reduced by the income from up to two weeks of rental activity.
Would someone want to rent your property?
Sure it sounds good, but why would someone want to rent your property?
Special events. If a big event is in town, consider renting out your home for participants and fans. Common examples include:
Conferences and expos
State high school tournaments
Vacation home rental. If you have a cabin or cottage, consider renting out your place for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.
Hotel alternatives. Oftentimes travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets travelers have a real local experience.
Know the risks.
The hassle factor needs to be considered prior to taking advantage of this tax-free income opportunity. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember that if you rent out your property for more than 14 days, all rent received is taxable and rental income rules apply. And don't forget to review any local regulations prior to renting your property. Home rental sites like Vrbo and Airbnb can help you better understand your options for renting your property.