Do you own a vacation home you rent out during the winter months? The place could be a goldmine of tax deductions, but you may be hampered by the passive activity loss (PAL) rules.
Strategy: Keep rental agreements to no more than a week. If you qualify under a tax law exception for short-term rentals, you can sidestep the PAL rules altogether.
Here’s the whole story: Generally, your deductions from passive activities can only offset income from other passive activities. Any excess passive loss is suspended and carried over to next year. For this purpose, a passive activity is defined as one in which you do not “materially participate” (see below).
Although rental real estate activity is automatically treated as a passive activity, a limited offset up to $25,000 is allowed for certain active participants. To qualify as an “active participant,” you must have “regular, continuous and substantial” involvement in the activity, li...(register to read more)