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Buyers Guide >   Tax Benefits

Tax Deductions for a Mountain Home

If you own or are thinking of owning a second home in Summit County, you might be wondering about offering it as a vacation, or short-term rental. Depending on the location and configuration, short-term rentals can bring in significant money to defray the cost of your vacation home, and 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.

Mostly Used as a Second Home

If your mountain home is used as a second home -- rather than renting it out as a business property -- you may deduct 100% of the interest you pay,  just as you can do on your first home -- up to a point.  That point is the interest on $1.1 million of debt secured by homes. This is combined debt, not the debt carried on each home. So, interest on debt up to $1.1 million is deducatable on your Schedule A (Itemized Deductions).

Property taxes are not limited like mortgage interest, and can be fully deducted for any number of homes you own. The same rules apply if you rent the home for NO MORE than 14 days per year. 

And, if you rent your vacation home for not more than 14 day,  the IRS does not require you to pay tax on the rental income. You may be able to deduct any uninsured casualty losses, though you can't write off rental-related expenses.  If the home is rented for more than 14 days, you must claim the income.

Tax Deductions for Rental Property

If your mountain home is used exclusively as a rental property, other tax rules apply. Without personal use the home is considered an investment or rental property by the IRS. You can deduct many expenses including taxes, insurance, mortgage interest, utilities, housekeeping and repairs. Even towels and sheets are deductible. You can also write off depreciation - the value lost due to the wear-and-tear over time.  You will use Schedule E to report the rental income and expense.

Time spent checking in on a house or making repairs doesn't count as personal use.  So, technically, you will be able to make use of your vacation property.

The tax benefits are a little more complex if you rent property more than 14 day (10 percent of the year), so you might want to plan before you rent, or even before you buy.  For different circumstances, different plans may be more profitable.

Mixed Use Of A Vacation Home

Say, you rent for more than 14 days: you must report all the rental income, but get to deduct all the expenses: your mortgage interest and property taxes, insurance premiums, utilities and other costs of renting the property.  You can also claim a depreciation deduction, and together all these may even result in a loss that you can subtract from your total income and reduce your total tax bill.

If you want to deduct all of the expenses, then you can use the home, for pleasure, no more than 14 days, or 10 percent of the number of days it is rented -- whichever is more. If you exceed this, then the home is considered a personal home, and you can't use the loss, but you can deduct the interest.  

Your use might fall somewhere in between, and you have to proportion the expenses. Say, for example, it's rented 60 days and your family uses it 30 days (90 days used, means 60 of 90 day or 2/3 of the time it was used it was a rental)  then, two thirds of your mortgage interest and property taxes, insurance premiums, utilities and other costs are rental expenses. The entire amount you pay a property manager would be deductible, too. And you could still claim depreciation deductions based on 2/3 of the value of the house, and this is often in the thousands.  You can see how rental income can easily offset cost, so you don't incur a higher tax liability, and you've brought in money to help pay the mortgage.

Rental property losses are not always deductible from regular income, but they can be accumulated to offset capital gains when the property is sold.

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.