IRS Rules for Rental Income if you Seldom Rent
California second home-owners benefit from the same federal tax incentives as those in other states, regardless of whether their fulltime residence is in California or not. Under federal tax law, the rate you pay depends on how much time you use the home for yourself -- including lending it to friends -- and how much time you rent it out at a fair market value. In fact, if you rent the house out fewer than 15 days a year, you can keep all the rental income, tax-free, regardless of how many days you use it yourself.
Internal Revenue Service rules for Rental Income if You Rent More Often
If you spend fewer than 14 days a year at your California home, or 10 percent of the time you rent it out, whichever is greater, you will have to report your second-home as a rental property and pay taxes on your rental income, although you may be able to deduct some expenses. If you use it more than 14 days a year, or 10 percent of the time you rent it out, the house will qualify as a residence. In this case, you will still have to report all your rental income on your federal tax return, but you can only deduct rental expenses up to the total amount of your rental income.
California Income Tax for Non-Residents
California income taxes are among the highest in the nation, and if you have a residence in another state, you will likely want to avoid paying income taxes in California. If the state considers you a non-resident, it will only tax your income derived from a California source -- in most cases for owners of second homes in California, this will likely be only the rental income you earn on the residence. Full-time residents, however, must pay state income taxes on every penny they earn, no matter where they earned it or what the source.
Income Tax Caveats
f the state Franchise Tax Board determines that, according to its definition, you are actually a full-time resident, you will have to pay the state's hefty income taxes on all of your income, including money you earn in other states. Unfortunately for owners of second homes in California, the definition of a full-time resident in California is a matter of interpretation. The law says that anyone who stays in California for any reason other than a temporary or transitory purpose is a legal resident and will be taxed as one. That means owning a second home in California can open you to a tax audit, and the state could determine you are a legal resident regardless of how you feel about the matter.
How to Avoid Paying California Income Taxes
Spending more than six months out of the year in your California home, storing large amounts of personal property there, or selling your residence in another state could put you at risk of being declared a full-time California resident. You should also avoid departing for vacations in other places from your California second home, especially if you plan to return to California afterward,