NEW YORK—The Internal Revenue Service needs to find ways to better communicate how it is handling technology modernization and transformation, including in areas such as the use of artificial intelligence in its processes, agency Office of Internal Consulting Chief Joseph Zeigler said.

NEW YORK—The Internal Revenue Service needs to find ways to better communicate how it is handling technology modernization and transformation, including in areas such as the use of artificial intelligence in its processes, agency Office of Internal Consulting Chief Joseph Zeigler said.

Speaking during a plenary session August 18, 2026, at the IRS Nationwide Tax Forum, Zeigler said it is his “hope that the IRS is going to a better job of telling this story” about how the agency is using technology to help improve its operations and make lives easier for taxpayers and the tax professionals who assist them.

As an example, Zeigler specifically highlighted some of the work the agency is doing with AI.

“When we talk about AI, AI is not meant to replace bodies or people and computers doing the work and there is no human input,” he said. Rather it is about how the IRS “can give our employees tools and resources [and] technology to make them better, more efficient” and improve the quality of their work. “All of those things is what I believe that AI and technology were meant for.”

He continued: “It’s taking our world-class employees and putting them on steroids, giving them the ability to come to the right answer sooner.”

And at the end is the ultimate goal of making the taxpayer experience that much better and more in line with what they expect from their customer interactions with the private sector.

“If we can come to an answer that right the first time, and we can come to it quick, and we can report it to the taxpayer [and say] here’s what’s going on,” he said. “All those things are at our fingertips.”

The IRS issued guidance in the form of sample forms and proposed rollover procedures to simplify, standardize, and expedite the completion of direct rollovers to or from a retirement plan. The guidance is designed to comply with Section 324 of the SECURE 2.0 Act (P.L. 117-328). Use of the sample forms and proposed rollover procedures is optional.

The IRS issued guidance in the form of sample forms and proposed rollover procedures to simplify, standardize, and expedite the completion of direct rollovers to or from a retirement plan. The guidance is designed to comply with Section 324 of the SECURE 2.0 Act (P.L. 117-328). Use of the sample forms and proposed rollover procedures is optional.

The IRS indicates that these sample forms are not inftended to be used for rollovers and transfers between IRAs. According to reports made by the Government Accountability Office and the IRS's conversations with IRA stakeholders, IRA-to-IRA transfers are already completed through an electronic transfer system that is considered uniform and efficient.

The guidance includes:

• (1) a proposed rollover procedure;
• (2) the participant's rollover request form;
• (3) the receiving plan's request to the distributing plan;
• (4) the distributing plan's rollover certification; and
• (5) the receiving plan's rollover acceptance.

The IRS is considering additional guidance to facilitate rollovers. Guidance under consideration includes: (1) eliminating the safe harbor that allows plans to send paper checks to participants to complete a direct rollover; (2) requiring administrators and trustees to complete rollovers via electronic transfers or paper checks sent directly to the receiving plan; and (3) providing for new safe harbors based on the use of sample forms.

Notice 2026-49

IR 2026-91

The IRS and Treasury have announced their intension to propose regulations relevant to Code Sec. 6433 and the SECURE 2.0 Act of 2022 (P.L. 117-328). For tax years beginning after December 31, 2026, Code Sec. 6433 allows certain low- and moderate-income individual taxpayers who have made qualified retirement savings contributions to receive matching contributions of up to $1,000 as saver’s match contributions.

The IRS and Treasury have announced their intension to propose regulations relevant to Code Sec. 6433 and the SECURE 2.0 Act of 2022 (P.L. 117-328). For tax years beginning after December 31, 2026, Code Sec. 6433 allows certain low- and moderate-income individual taxpayers who have made qualified retirement savings contributions to receive matching contributions of up to $1,000 as saver’s match contributions.

Background

On April 30, 2026, President Trump issued an executive order to (1) increase public awareness of saver’s match contributions; (2) facilitate participation in eligible retirement savings vehicles; and (3) establish a website that informs about high-quality, low-cost IRAs and taxpayers without an employer-sponsored retirement plan. These taxpayers include independent contractors.

Saver’s Match Contributions vs Saver’s Credit

For tax years beginning after December 31, 2026, Saver’s Match contributions would replace the Saver’s Credit under Code Sec. 25B. This would apply to elective contributions, qualifying retirement plans and IRAs.

However, the Saver’s Credit would continue to be available after December 31, 2026, with respect to contributions made to ABLE accounts under Code Sec. 529A. Saver’s match contributions would be claimed on a new (unpublished) Form 8880-A, Saver’s Match for Qualified Retirement Savings Contributions.

Eligibility

Individual taxpayers who make qualified retirement savings contributions could be eligible for a Saver's Match contribution based on those contributions. The contributions to a new or already-existing IRA after the end of a tax year could be made until the tax filing deadline. The contributions should be designated as being made for the prior tax year.

Tax Status

An eligible individual taxpayer’s saver’s match contribution directly paid by the Treasury to a retirement plan is generally treated as an elective deferral made by the individual taxpayer. The contribution is not taken into account for any elective deferral and catch-up limitations that apply to Code Secs. 401(k), 403(b), or governmental 457(b) plans.

Comments Requested

The Treasury Department and the IRS request comments on the issues addressed on or before October 5, 2026. Comments can be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov.

Notice 2026-48

IR 2026-89

The Treasury Department and IRS have issued initial guidance on the employer credit under Code Sec. 45S for premiums paid on family and medical leave insurance as provided by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Beginning in 2026, an employer may elect to determine the credit based on premiums paid or incurred during the tax year with respect to an insurance policy that provide such leave instead of based on wages paid to a qualifying employee during paid family and medical leave. The Treasury intends to issue proposed regulations that include this guidance.

The Treasury Department and IRS have issued initial guidance on the employer credit under Code Sec. 45S for premiums paid on family and medical leave insurance as provided by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Beginning in 2026, an employer may elect to determine the credit based on premiums paid or incurred during the tax year with respect to an insurance policy that provide such leave instead of based on wages paid to a qualifying employee during paid family and medical leave. The Treasury intends to issue proposed regulations that include this guidance.

Premium Method for Credit

The credit may be claimed under the premium method beginning in 2026 only to the extent the insurance premium funds a benefit that would be creditable under the wage method. Thus, the premium must be for insurance coverage with respect to leave that is:

• paid family and medical leave as defined under the Family Medical Leave Act (FMLA), or required by state local law or paid for by a state or local government,
• payable to an individual who is a qualifying employee of the employer at the time the premium is paid or incurred, and
• provides a benefit that would constitute wages to the employee.

In the case of a premium paid or incurred for an insurance policy that provides both creditable coverage and noncreditable coverage, the employer must allocate the premium between the creditable coverage and the noncreditable coverage using any reasonable method. For example, a blended premium would be a premium for coverage that provides both qualifying paid family and medical leave and other types of leave, or coverage for qualifying employees and nonqualifying employees.

An employer may calculate the tax credit using both the wage method with respect to certain leave and the premium method with respect to other leave. However, an employer may not use the wage method to claim a credit for wages paid to the extent that the employer claims a credit using the premium method for creditable coverage that funds such benefits (or vice versa).

Notice 2026-28

IR 2026-86

The IRS updated frequently asked questions (FAQs) for qualified overtime compensation. The FAQs update guidance on (1) the qualified overtime compensation deduction; (2) coverage and exemptions under the Fair Labor Standards Act (FLSA); (3) Form W-2, Form 1099-MISC, and Form 1099-NEC requirements; and more.

The IRS updated frequently asked questions (FAQs) for qualified overtime compensation. The FAQs update guidance on (1) the qualified overtime compensation deduction; (2) coverage and exemptions under the Fair Labor Standards Act (FLSA); (3) Form W-2, Form 1099-MISC, and Form 1099-NEC requirements; and more.

Qualified Overtime Compensation Deduction

The deduction is up to $12,500 of qualified overtime compensation earned for the year per individual tax return. It is $25,000 for joint return. The deduction is reduced if a taxpayer’s modified adjusted gross income (MAGI) for the tax year exceeds $150,000, and $300,000 for joint filers.

Coverage and Exemptions Under FLSA

The IRS noted that overtime under the FLSA must be paid to individual taxpayers who are (1) covered by the FLSA; and (2) not exempt from the FLSA’s overtime requirement. Ineligible taxpayers would not receive qualified overtime compensation regardless of other laws or circumstances. Employees who are exempt from the FLSA’s overtime requirement include teachers, academic administration personnel, employees of certain seasonal amusement or recreational establishments and more.

Employee-owners of businesses are not FLSA overtime-eligible employees. An employee who owns at least a bona fide 20-percent equity interest in the enterprise in which they are employed is ineligible.

Reporting Requirements

Starting in tax year 2026, payors and employers are required to separately report qualified overtime compensation on a Form 1099-MISC, Form 1099-NEC or Form W-2. Independent contractors would only report qualified overtime compensation on a Form 1099- MISC or Form 1099-NEC.

FS-2026-13

IR 2026-88

The Fifth Circuit Court of Appeals held that the original public meaning of "limited partner" in Code Sec. 1402(a)(13) is a partner who plays no significant role in managing or running a business. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310). The Fifth Circuit also withdrew its prior opinion in Sirius Solutions, L.L.L.P. (this was the prior name of the limited liability limited partnership in this litigation).

The Fifth Circuit Court of Appeals held that the original public meaning of "limited partner" in Code Sec. 1402(a)(13) is a partner who plays no significant role in managing or running a business. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310). The Fifth Circuit also withdrew its prior opinion in Sirius Solutions, L.L.L.P. (this was the prior name of the limited liability limited partnership in this litigation).

Background

A limited liability limited partnership operated a business consulting firm, and was owned by several limited partners and one general partner. For the tax years at issue, the limited partnership allocated all of its ordinary business income to its limited partners. Based on the limited partnership tax exception in Code Sec. 1402(a)(13), the limited partnership excluded the limited partners’ distributive shares of partnership income or loss from its calculation of net earnings from self-employment during those years, and reported zero net earnings from self-employment.

The IRS adjusted the limited partnership's net earnings from self-employment, and determined that the distributive share exception in Code Sec. 1402(a)(13) did not apply because none of the limited partnership’s limited partners counted as "limited partners" for purposes of the statutory exception. The Tax Court upheld the adjustments, stating it was bound by Soroban.

Limited Partners and Self Employment Tax

Code Sec. 1402(a)(13) excludes from a partnership's calculation of net earnings from self-employment the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments in Code Sec. 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.

In Soroban, the Tax Court determined that Congress had enacted Code Sec. 1402(a)(13) to exclude earnings from a mere investment, and intended for the phrase "limited partners, as such" to refer to passive investors. Thus, the Tax Court there held that the limited partner exception of Code Sec. 1402(a)(13) did not apply to a partner who is limited in name only, and that determining whether a partner is a limited partner in name only required an inquiry into the limited partner's functions and roles.

No Significant Role in Management

The Fifth Circuit stated that the backdrop against which Congress enacted Code Sec. 1402(a)(13) in 1977 suggested that some participation is allowed, so long as the partners do not exercise control over the business, and that the plain text of the statute points towards this conclusion. The court observed that all relevant sources suggested that when the statute was enacted, the ordinary public meaning of"limited partner" included a partner who did not play a significant role in managing or running the business.

The Fifth Circuit rejected the Tax Court’s Soroban decision, which held that that the term "limited partner" could refer only to passive investors. The court stated that the Tax Court had selected a rule that was divorced from statutory text and that appeared to prohibit even the most minor involvement in corporate affairs. In the Fifth Circuit's view, it would have been understood at the time Congress enacted Code Sec. 1402(a)(13) that a limited partner could not manage the partnership, but perhaps could participate in certain nonmanagerial aspects of the business.

The court also stated that the Soroban decision could not be squared with decades of IRS-approved guidance insisting that what mattered was limited liability alone. The court characterized the IRS's position to be that it could change the meaning of "limited partner" from "limited liability alone" to the "passive investor" standard with no action from Congress to amend the text of Code Sec. 1402(a)(13). Even assuming that the IRS could unilaterally effectuate such changes through tax instructions, the court stated that the IRS's instructions must comport with the original public meaning of the text enacted by Congress.

Withdrawing Sirius Solutions, L.L.L.P., CA-5, 2026-1 ustc ¶50,109, and vacating and remanding an unreported Tax Court opinion.

K Alain, L.L.L.P., CA-5

The IRS has issued final regulations that clarify when backup withholding applies to payments made in settlement of third party network transactions. The final rules reflect amendments to Code Secs. 6050W and 3406 made by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21), and apply to payments made in calendar years beginning after December 31, 2024.

The IRS has issued final regulations that clarify when backup withholding applies to payments made in settlement of third party network transactions. The final rules reflect amendments to Code Secs. 6050W and 3406 made by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21), and apply to payments made in calendar years beginning after December 31, 2024.

Under the de minimis payment rule of Code Sec. 6050W(e) for information reporting purposes, a third party settlement organization (TPSO) must report payments made in settlement of third party network transactions to a payee only if the payments exceed $20,000 and 200 transactions in a calendar year. The final regulations align the backup withholding obligations under Code Sec. 3406 with this reporting threshold.

A payment will be considered a reportable payment subject to backup withholding only if both the $20,000 and 200 transaction thresholds are exceeded during the calendar year. The amount subject to backup withholding includes the entire amount of the transaction that causes either threshold to be breached, whichever occurs later, and the amount of any subsequent transactions made to the payee during the same calendar year. Further, if the TPSO made payments in settlement of third party network transactions to the payee in the previous calendar year that were reportable payments under the backup withholding rules, the de minimis exception to backup withholding would not to payments made to that payee in the current calendar year.

Participating Payees

In the preamble to the Treasury Decision, the Treasury Department and the IRS used the opportunity to clarify that de minimis TPSO reporting and the backup withholding thresholds apply with respect to each participating payee, as defined by Code Sec. 6050W(d)(1).

T.D. 10053

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule that permanently removes the requirement that U.S. companies and U.S. persons must report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act. The final rule adopts, with limited changes, an interim final rule issued on March 26, 2025, that narrowed the BOI reporting requirements.

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule that permanently removes the requirement that U.S. companies and U.S. persons must report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act. The final rule adopts, with limited changes, an interim final rule issued on March 26, 2025, that narrowed the BOI reporting requirements.

The Corporate Transparency Act (CTA) was enacted in 2021 as part of the broader Anti-Money Laundering Act of 2020. Its reporting requirement had been characterized as an important step in the fight against money laundering, financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.

In late 2024 and early 2025, however, several federal district courts preliminarily enjoined FinCEN from implementing and enforcing the reporting rule. The Treasury Department announced in March 2025 that it was suspending enforcement of the CTA and its reporting requirements against U.S. citizens, domestic reporting companies, and their beneficial owners, and issued the interim final rule.

BOI Reporting Exemptions

The final rule:

• adopts exemptions that make the rollback of beneficial ownership reporting by U.S. companies permanent,
• exempts foreign pooled investment vehicles registered in the United States from reporting the BOI of a U.S person in control of the investment vehicle, and
• confirms that FinCEN will delete information about any individual that it reasonably believes is a U.S. person (for example, information that is linked to a U.S. passport or U.S. driver's license).

The final rule also makes substantive changes that expand on the relief in the interim final rule, by:

• exempting foreign companies from the requirement to report U.S. person “company applicants” (i.e., the individuals who helped those foreign companies register to do business in the United States), and
• exempting U.S. persons who have applied for FinCEN Identifiers (FinCEN IDs) from having to update or correct the information they provided to FinCEN when they applied.

Foreign entities that are reporting companies are still required under the final rule to report BOI for foreign individuals.

FinCEN has also issued answers to frequently asked questions on the final rule.

FinCEN Final Rule RIN-1506-AB67

If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

Regardless of the type of record keeper you consider yourself to be, there are numerous ways to simplify the burden of logging your automobile expenses for tax purposes. This article explains the types of expenses you need to track and the methods you can use to properly and accurately track your car expenses, thereby maximizing your deduction and saving taxes.

Expense methods

The two general methods allowed by the IRS to calculate expenses associated with the business use of a car include the standard mileage rate method or the actual expense method. The standard mileage rate for 2017 is 53.5 cents per mile. In addition, you can deduct parking expenses and tolls paid for business. Personal property taxes are also deductible, either as a personal or a business expense. While you are not required to substantiate expense amounts under the standard mileage rate method, you must still substantiate the amount, time, place and business purpose of the travel.

The actual expense method requires the tracking of all your vehicle-related expenses. Actual car expenses that may be deducted under this method include: oil, gas, depreciation, principal lease payments (but not interest), tolls, parking fees, garage rent, registration fees, licenses, insurance, maintenance and repairs, supplies and equipment, and tires. These are the operating costs that the IRS permits you to write-off. For newly-purchased vehicles in years in which bonus depreciation is available, opting for the actual expense method may make particularly good sense since the standard mileage rate only builds in a modest amount of depreciation each year. For example, for 2017, when 50 percent bonus depreciation is allowed, maximum first year depreciation is capped at $11,160 (as compared to $3,160 for vehicles that do not qualify). In general, the actual expense method usually results in a greater deduction amount than the standard mileage rate. However, this must be balanced against the increased substantiation burden associated with tracking actual expenses. If you qualify for both methods, estimate your deductions under each to determine which method provides you with a larger deduction.

Substantiation requirements

Taxpayers who deduct automobile expenses associated with the business use of their car should keep an account book, diary, statement of expenses, or similar record. This is not only recommended by the IRS, but essential to accurate expense tracking. Moreover, if you use your car for both business and personal errands, allocations must be made between the personal and business use of the automobile. In general, adequate substantiation for deduction purposes requires that you record the following:

• The amount of the expense;
• The amount of use (i.e. the number of miles driven for business purposes);
• The date of the expenditure or use; and
• The business purpose of the expenditure or use.

Suggested recordkeeping: Actual expense method

An expense log is a necessity for taxpayers who choose to use the actual expense method for deducting their car expenses. First and foremost, always keep your receipts, copies of cancelled checks and bills paid. Maintaining receipts, bills paid and copies of cancelled checks is imperative (even receipts from toll booths). These receipts and documents show the date and amount of the purchase and can support your expenditures if the IRS comes knocking. Moreover, if you fail to log these expenses on the day you incurred them, you can look back at the receipt for all the essentials (i.e. time, date, and amount of the expense).

Types of Logs. Where you decide to record your expenses depends in large part on your personal preferences. While an expense log is a necessity, there are a variety of options available to track your car expenditures - from a simple notebook, expense log or diary for those less technologically inclined (and which can be easily stored in your glove compartment) - to the use of a smartphone or computer. Apps specifically designed to help track your car expenses can be easily downloaded onto your iPhone or Android device.

Timeliness. Although maintaining a daily log of your expenses is ideal - since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses - this may not always be the case for many taxpayers. According to the IRS, however, you do not need to record your expenses on the very day they are incurred. If you maintain a log on a weekly basis and it accounts for your use of the automobile and expenses during the week, the log is considered a timely-kept record. Moreover, the IRS also allows taxpayers to maintain records of expenses for only a portion of the tax year, and then use those records to substantiate expenses for the entire year if he or she can show that the records are representative of the entire year. This is referred to as the sampling method of substantiation. For example, if you keep a record of your expenses over a 90-day period, this is considered an adequate representation of the entire year.

Suggested Recordkeeping: Standard mileage rate method

If you loathe recordkeeping and cannot see yourself adequately maintaining records and tracking your expenses (even on a weekly basis), strongly consider using the standard mileage rate method. However, taking the standard mileage rate does not mean that you are given a pass by the IRS to maintaining any sort of records. To claim the standard mileage rate, appropriate records would include a daily log showing miles traveled, destination and business purpose. If you incur mileage on one day that includes both personal and business, allocate the miles between the two uses. A mileage record log, whether recorded in a notebook, log or handheld device, is a necessity if you choose to use the standard mileage rate.

If you have any questions about how to properly track your automobile expenses for tax purposes, please call our office. We would be happy to explain your responsibilities and the tax consequences and benefits of adequately logging your car expenses.

Under the so-called "kiddie tax," a minor under the age of 19 (or a student under the age of 24) who has certain unearned income exceeding a threshold amount will have the excess taxed at his or her parents' highest marginal tax rate. The "kiddie tax" is intended to prevent parents from sheltering income through their children.

A child with earned income (wages and other compensation) in excess of the filing threshold is a separate taxpayer who is generally taxed as a single taxpayer. If a child in one of the following categories has unearned income (i.e., investment income) in excess of the "threshold amount" ($950 in 2009) that unearned income is taxed at the parent's marginal tax rate, as if the parent received that additional income.

• A child under the age of 19;
• A child up to age 18 who provides less than half of his or her support with earned income; or
• A19 to 23 year-old student who provides less than half of his or her support with earned income.

If the child's unearned income is less than an inflation-adjusted ceiling amount ($9,500 in 2009), the parent may be able to include the income on the parent's return rather than file a separate return for the child (and which the tax based on the parent's marginal rate bracket is computed on Form 8615).

Any distribution to a child who is a beneficiary of a qualified disability trust is treated as the child's earned income for the tax year the distribution was received.

Example:  Greta is a 16-year-old whose father is alive. In 2009, she has $3,000 in unearned income, no earned income, and no itemized deductions. Her basic standard deduction is $950, which is applied against her unearned income, reducing it to $2,050. The next $950 of unearned income is taxed at Greta's individual tax rate. The remaining $1,100 of her unearned income is taxed at her parent's allocable tax rate. Assuming her father's tax rate bracket is 25 percent, her tax on the $1,100 is $275.

If you own a vacation home, you may be considering whether renting the property for some of the time could come with big tax breaks. More and more vacation homeowners are renting their property. But while renting your vacation home can help defray costs and provide certain tax benefits, it also may raise some complex tax issues.

Determining whether to use your vacation home as a rental property, maintain it for your own personal use, or both means different tax consequences. How often will you rent your home? How often will you and your family use it? How long will it sit empty? Depending on your situation, renting your vacation home may not be the most lucrative approach for you.

Generally, the tax benefits of renting your vacation home depend on how often you and your family use the home and how often you rent it. Essentially, there are three vacation home ownership situations for tax purposes. We will go over each, and their tax implications.

Tax-free rental income

If you rent your vacation home for fewer than 15 days during the year, the rental income you receive is tax-free; you don't even have to report it on your income tax return. You can also claim basic deductions for property taxes and mortgage interest just as you would with your primary residence.

You won't, however, be able to deduct any rental-related expenses (such as property management or maintenance fees). And, if your rental-related expenses exceed the income you receive from renting your vacation home for that brief time, you can't take a loss. Nevertheless, this is an incredibly lucrative tax break, especially if your vacation home is located in a popular destination spot or near a major event and you don't want, or need, to rent it out for a longer period. If you fit in this category of vacation homeowners and would like more information on this significant tax benefit, call our office.

Pure rental property

Do you plan on renting your vacation home for more than 14 days a year? If so, the tax rules can become complicated. If you and your family don't use the property for more than 14 days a year, or 10% of the total number of days it is rented (whichever is greater), your vacation home will qualify as rental property, not as a personal residence.

If you rent your vacation home for more than 14 days, you must report all rental income you receive. However, now you can deduct certain rental-related expenses, including depreciation, condominium association fees, property management fees, utilities, repairs, and portions of your homeowner's insurance. How much you can deduct will depend on how often you and your family use the property. But, as the owner of investment property, you can take a loss on the ultimate sale of your rental homes, which second-homeowners can't do.

Income and deductions generated by rental property are treated as passive in nature and subject to passive activity loss rules. As passive activity losses, rental property losses can't be used to offset income or gains from non-passive activities (such as wages, salaries, interest, dividends, and gains from the sale of stocks and bonds). They can only be used to offset income or gains from other passive type activities. Passive activity losses that you can't use one year, however, can be carried forward to future years.

However, an owner of rental property who "actively participates" in managing the rental activities of his or her vacation home, and has an adjusted gross income that doesn't exceed $100,000, can deduct up to $25,000 in rental losses against other non-passive income, such as wages, salaries, and dividends. It's not all that difficult to meet the "active participation" test if you try.

Personal use for more than 14 days

If you plan on using your vacation home a lot, as well as renting it often, your vacation home will be treated as a personal residence. Specifically, if you rent your home for more than 14 days a year, but you and your family also use the home for more than 14 days, or 10% of the rental days (whichever is greater), your vacation home will qualify as a personal residence, not a rental property, and complex tax issues arise.

All expenses must be apportioned between rental and personal use, based on the total number of days the home is used. For example, you must allocate interest and property taxes between rental and personal use so that a portion of your mortgage interest payments and property taxes will be reported as itemized deductions on Schedule A (the standard form for itemized deductions) and a portion as deductions against rental income on Schedule E (the form for rental income and expenses.) You will only be able to deduct your rental expense up to the total amount of rental income.  Excess losses can be carried forward to future years though.

Proper planning

With proper planning and professional advice, you can maximize tax benefits of your vacation home. Please call our office if you have, or are planning to buy, a vacation home and would like to discuss the tax consequences of renting your property.

The benefits of owning a vacation home can go beyond rest and relaxation. Understanding the special rules related to the tax treatment of vacation homes can not only help you with your tax planning, but may also help you plan your vacation.

The benefits of owning a vacation home can go beyond rest and relaxation. Understanding the special rules related to the tax treatment of vacation homes cannot only help you with your tax planning, but may also help you plan your vacation.

For tax purposes, vacation homes are treated as either rental properties or personal residences. How your vacation home is treated depends on many factors, such as how often you use the home yourself, how often you rent it out and how long it sits vacant. Here are some general guidelines related to the tax treatment of vacation homes.

Treated as Rental Property

Your home will fall under the tax rules for rental properties rather than for personal residences if you rent it out for more than 14 days a year, and if your personal use doesn't exceed (1) 14 days or (2) 10% of the rental days, whichever is greater.

Example - You rent your beach cottage for 240 days and vacation 23 days. Your home will be treated as a rental property. If you had vacationed for 1 more day (for a total of 24 days), though, your home would be back under the personal residence rules.

Income: Generally, rental income should be fully included in gross income. However, there is an exception. If the property qualifies as a residence and is rented for fewer than 15 days during the year, the rental income does not need to be included in your gross income.

Expenses: Interest, property taxes and operating expenses should all be allocated based on the total number of days the house was used. The taxes and interest allocated to personal use are not deductible as a direct offset against rental income. In the example above, the total number of days used is 263, so the split would be 23/263 for personal use and 240/263 for rental.

Any net loss generated will be subject to the passive activity loss rules. In general, passive losses are deductible only to the extent of passive income from other sources (such as rental properties that produce income) but if your modified adjusted gross income falls below a certain amount, you may write off up to $25,000 of passive-rental real estate losses if you "actively participate". "Active participation" can be achieved by simply making the day-to-day property management decisions. Unused passive losses may be carried over to future years

Planning Note: If your personal use does exceed the greater of (1) 14 days, or (2) 10% of rental days, the special vacation home rules apply. This means you drop back into the personal residence treatment, which allows you to deduct the interest and taxes and usually wipe out your rental income with deductible operating expenses. This is explained in greater detail below.

Treated as Personal Residence

If you use your vacation home for both rental and a significant amount of personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. Remember that personal use includes use by family members and others paying less than market rental rates. Days you spend working substantially full time repairing and maintaining your property are not counted as personal use days, even if family members use the property for recreational purposes on those days.

Rented 15 days or more. If you rent out your home more than 14 days a year and have personal use of more than (1) 14 days or (2) 10% of the rental days, whichever is greater, your home will be treated as a personal residence.

Income: You must include all of your rental receipts in your gross income. Again, however, if the property qualifies as a residence and is rented for fewer than 15 days, the rental income does not need to be included in your gross income.

Expenses:

Interest and Taxes: Mortgage interest and property taxes must be allocated between rental and personal use. Personal use for this allocation includes days the home was left vacant.

Example: You rent your mountain cabin for 4 months, have personal use for 3 months, and it sits empty for 5 months. The amount of interest and taxes allocated to rental use would be 33% (4 months/12 months) and since vacant time is considered personal use, you would allocate 67% (8 months/12 months) to personal use. The rental portion of interest and taxes would be included on Schedule E and the personal part would be claimed as itemized deductions on Schedule A.

Operating Expenses: Rental income should first be reduced by the interest and tax expenses allocated to the rental portion (33% in our example above). After that allocation is made, you can deduct a percentage of operating expenses (maintenance, utilities, association fees, insurance and depreciation) to the extent of any rental income remaining. When calculating the allocation percentage for operating expenses, vacancy days are not included. Any disallowed rental expenses are carried forward to future years.

Planning Note: It would be wise to try to balance rental and personal use so that rental income is "zeroed" out since, even though losses may be carried forward, they still risk going used. Mortgage interest should be fully deductible on Schedule A as a second residence. If more than two homes are owned, choose the vacation home with the biggest loan as the second residence. Property taxes are always deductible no matter how many homes are owned.

Rented fewer than 15 days. If you have the opportunity to rent your home out for a short period of time (< 15 days), you will not have to worry about the tax consequences. This rental period is "ignored" for tax purposes and the house would be treated purely like a personal residence with no tricky allocation methods required.

Income: You do not include any of the rental income in gross income.

Expenses: Interest and taxes are claimed on Schedule A. You can not write off any operating expenses (maintenance, utilities, etc...) attributable to the rental period.

Planning Note: Take advantage of this "tax-free" income if you get the chance. Short-term rentals during major events (such as the Olympics) can be a windfall.

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