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Enjoy tax benefits if you own a vacation home

June 3, 2020

Are you planning to use your vacation home soon? If you’re not going to use it, have you considered renting it? Or are you thinking of buying a vacation home? Vacation homes, with proper tax planning, can help create tax benefits.

Some types of qualifying vacation or “second homes” which might have escaped your notice are boats, motor homes, timeshares, and trailers. Three simple tests must be met to have a second home: each must have sleeping, cooking, and toilet facilities. If your camper has these facilities, you have a second home for tax purposes.

Owners of vacation homes face a set of tricky tax rules. How these apply to you depends on your personal and rental use of the home during the year. Here are the general rules:

  • 100 percent personal use. If you never rent out your vacation home, you can generally deduct mortgage interest and property taxes as itemized deductions. Or, if you rent it out for 14 days or less, the rental use is disregarded. The rent income is tax-free and any expenses related to the rental property (other than mortgage interest and property taxes) are nondeductible.
  • 100 percent rental use. If the home is rented without personal use, it’s treated as rental property. (Personal use means use by your family or anyone who doesn’t pay full market rent.) With rental property, you can deduct interest, taxes, operating expenses (utilities, maintenance, etc.), and depreciation. However, your current loss deduction may be limited by the passive loss rules.
  • Mixed personal and rental use. If there are more than 14 rental days and personal use doesn’t exceed the greater of (1) 14 days, or (2) 10 percent of rental days, you have a rental property. This can be bad news. Interest and taxes must be allocated between rental and personal use. If there is a rental loss, it may not be currently deductible because of the passive loss rules, and the interest allocable to the personal use part of the year is not deductible. If personal use exceeds the greater of 14 days or 10 percent of rental days, special vacation home rules apply. The rental income is reduced by allocable interest and taxes.  Additional rental property expenses and depreciation are deductible, but only to the extent of the rent income.  No loss is allowed.  Any disallowed rental expenses are carried forward to future years.
  • Optimize your tax benefits. Although they’re complicated, the vacation home rules present a place where you can easily make adjustments to optimize your tax benefits. The optimal personal use and tax treatment of a vacation home is different for every client.
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