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Tax Deductions For Vacation Homes

Posted by Breckenridge Associates Real Estate on Monday, July 4th, 2011 at 6:01pm.

If you own or intend to purchase a vacation home and are considering placing it into the local rental pool, you may be eligible for tax deductions on your rental property. Varying deductions apply depending on how much you use the property and whether or not you rent it out.

Read further for tax deduction specifics with highlights from the National Association of REALTOR's article written by Donna Fuscaldo.

Is Your Vacation Home A Vacation Home?
If you purchased your vacation home exclusively for personal enjoyment, you can generally deduct your mortgage interest and real estate taxes, as you would on a primary residence. Use Schedule A to take the deductions.

The IRS allows you to rent out your vacation home for up to 14 days each year without paying taxes on rental income. You may be able to deduct any uninsured casualty losses as well, though you can't write off rental-related expenses. (More below.) If the home is rented for more than 14 days, you must claim the income.

If you own what you consider a vacation home but never visit it, or only rent it out, other tax rules apply. Without personal use the home is considered an investment or rental property by the IRS. Time spent checking in on a house or making repairs doesn't count as personal use.

Tax Deductions For Rental Owners
As an exclusive rental property, you can deduct many expenses including taxes, insurance, mortgage interest, utilities, housekeeping and repairs. Even towels and sheets are deductible. Use Schedule E. You can also write off depreciation, the value lost due to the wear and tear a home experiences over time.

Treat the rental property like a business. Keep detailed records and maintain a separate checking account. Figure you'll spend a couple of hours a week, on average, over the course of the year managing the property.

To maximize deductions you need to be actively involved in the rental property. That means performing such duties as approving new tenants and coming up with rental terms. You also need to own at least 10% of the property. See IRS Publication 527 for details.

If your adjusted gross income is $100,000 or less you can deduct from your taxable income up to $25,000 in rental losses - that is, the difference between your rental income and your rental expenses. The deduction gradually phases out between an AGI of $100,000 and $150,000. You may be able to carry forward excess losses to future years, or use losses to offset taxable gains when you sell.

Expenses can add up. HOA fees, routine maintenance costs and utilities are some of the costs you may be responsible for but could be potential deductions that end up cutting your tax bill.

Mixed Use Of A Vacation Home
The tax picture gets more complicated when in the same year you make personal use of your vacation home and rent it out for more than 14 days. Rental income is tax-free only if you rent for 14 days or fewer.

The key to maximizing deductions is keeping annual personal use of your vacation home to fewer than 15 days or 10% of the total rental days, whichever is greater. In that case the vacation home can be treated as a rental, meaning you get the same generous deductions. To avoid going over the 10% limit, essentially you shouldn't use your vacation home more than one day for every 10 days you rent it.

Make personal use of your vacation home for more than 14 days (or more than 10% of the total rental days), and your deductions may be limited. If your rental income is less than your rental expenses, for example, you can't use the loss to offset other sources of income. There's a worksheet that determines which expenses you can carry over to the following year.

Another Consideration: The IRS requires you to divide expenses between personal use and rental use. Let's say you have a vacation home you personally use for 25 days and rent for 75 days. That's 100 total days of use. You can only write off 75% of the expenses as rental expenses - 75 rental days divided by 100 total days of use works out to 75%. Some of the personal expenses, such as mortgage interest and real estate taxes, may be deductible on Schedule A.

IRS Closes Tax Loophole
A popular strategy used by owners of vacation homes to avoid paying capital gains on a sale was to convert a vacation home into a primary residence. This was accomplished by living in the home for two years out of the previous five before selling. By doing so a gain on the sale of up to $250,000 for single filers ($500,000 for married filing jointly) was tax-free.

The IRS hasn't done away with the capital gains exclusion, but it is closing the loophole for vacation homes. Starting in 2009, you have to pay regular capital gains taxes on the portion of the gain that's equivalent to the time you used the home as a vacation home after 2008.

Source: Topline highlights from article written by Donna Fuscaldo for the National Association of REALTORS
Donna Fuscaldo has written about personal finance for more than 10 years at the Wall Street Journal, Dow Jones Newswires, and Fox Business. Read the full article by clicking here.

Please contact us to learn more about real estate in Breckenridge and Summit County, Colorado. 800.774.7970 or 970.453.2200. Click here for the latest news about Breckenridge Real Estate.

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