Your Vacation Home Could Provide Tax-free Income

If you plan to rent out your vacation home, it's important to understand how your proceeds will be taxed.

- By Sandra Block

IF you own a vacation home, there's a good chance you use it primarily as a getaway for your family and friends. But if it's located in an area that's popular with tourists, don't overlook an opportunity to earn extra tax-free income by renting it out.

As long as you rent your home for 14 days or less during the year, you're not required to report rental income on your tax return. The exception applies no matter how much you charge for the 14-day stay. The rule also applies to your primary residence, so if Bruce Springsteen and the E Street Band is coming to your town this year, you may be able to rent your home to fans of the Boss and retreat to your vacation home for the weekend.

The IRS provision allowing individuals to exclude shortterm temporary income is known as the “Masters rule” because residents of Augusta, Ga., successfully lobbied for the exemption back in the 1970s so they could rent out their homes during the annual Augusta National Golf Club Masters tournament. In enacting the provision,