Whether your vacation home is an oceanfront manor or a small cabin in the woods, it can provide significant tax advantages. How often you use the home and how much you rent it are the primary determinants of your vacation home's tax treatment. The California Society of CPAs (www.calcpa.org) explains what you need to know to gain maximum tax advantage from your vacation property.
Minimal Rental Brings Tax-Free Income
If you rent your vacation home for less than 15 days during the year, any rental income you earn is tax-free. You don't even have to show it on your tax return.
In terms of mortgage interest and property taxes, a vacation home used mainly for personal purposes receives the same tax treatment as your primary residence. You may fully deduct mortgage interest on up to $1 million of acquisition mortgage debt on your first and second home. Property taxes are also deductible, but you cannot write off any rental-related expenses.
Renting More Than 14 Days
If you rent your vacation home for more than 14 days per year and your personal use of the place exceeds 14 days per year or 10 percent of the number of days it is rented, whichever is greater, all rental payments are included in income and limited rental expenses may be deducted. You may be able to write off certain rental-related expenses, but only up to the amount of your rental income. Expenses that relate only to renting, such as advertising and commissions paid to a rental agent, may be fully deducted. Next, mortgage interest and property taxes, which are deductible whether or not the property is rented, are allocated between rental and personal usage. Finally, all other expenses, such as insurance, maintenance and repairs that apply to the property itself must be allocated between rental and personal use. Expenses that cannot be currently deducted may be carried forward to future years.
Personal Use May Be More Than Meets the Eye
Be aware that when you allow family members to stay in your vacation home, you must count any part of the day the home is used by parents, siblings, children, grandparents and grandchildren as personal time, regardless of how much they pay for the privilege. If a friend rents your home for less than the fair market rate, that also counts as personal use. On the other hand, days spent at your vacation home to make repairs do not count as personal use. This is true even if other family members use the home during the same time for recreational purposes.
Limited Personal Use Leads To Greater Tax Benefits
If you do not use your vacation home for personal purposes for the greater of more than 14 days during the year or more than 10 percent of the number of days the home is rented, the limitation rules do not apply. However, restriction of expenses may still apply if the rental of the residence is not engaged in for profit.
If the status of your property qualifies as rental property, it is possible for you to write off more expenses—up to $25,000 in excess of your rental income, if you actually manage the property. This amount is phased out to zero if your adjusted gross income is between $100,000 and $150,000. There are additional rules regarding the order in which you must deduct your expenses and you must actively manage the property to qualify for the deduction.
Consult With a CPA
Owning a vacation home requires attention to many tax details. A CPA can guide you in your tax planning efforts and help you make the most of those tax benefits available to you.