Tax Treatment of Short Term Residential Rentals: Reform Proposal

RS22052 -- Tax Treatment of Short Term Residential Rentals: Reform Proposal

Updated April 26, 2006


Generally, taxable income has included rental income from real property. However, an exclusion for de minimis(1) rental income (from the rental of a taxpayer's residence for a period of less than 15 days per year) was enacted by the Tax Reform Act of 1976, (P.L. 94-455). Since that time, a number of tax reform proposals have called for inclusion of de minimis rental income as taxable income. The most recent proposal was contained in a report prepared by the Joint Committee on Taxation at the behest of Senators Grassley and Baucus. The proposal would cap the currently unlimited exclusion at $2,000 and rental income greater than $2,000 would be included as taxable income. Deductions for operating costs associated with the rental period (and depreciation) would be allowable but would reduced in proportion to the ratio of excludable income to total rental income from the property. The effective date would be for taxable years beginning after the date of enactment.

The proposed changes would provide more equitable tax treatment of income than current law, but at the cost of increased record-keeping for taxpayers and enforcement problems for the Internal Revenue Service. It appears that no changes would be made to present-law treatment of expenses allowable to taxpayers (e.g., mortgage interest, property taxes, and casualty losses). The Joint Committee on Taxation has estimated that the proposal would increase revenues by approximately $10 million each fiscal year.

This report will be updated in the event of legislative changes.