A vacation home can give you that much needed break from every day stress but it also has the potential to give you a break on income taxes. What vacation home expenses are deductible depends on a number of factors, especially how often you visit and whether you allow renters. Even RVs and boats can count but they must contain sleeping, cooking, and bathroom facilities.
If you bought a vacation home exclusively for personal enjoyment, you can generally deduct your mortgage interest and real estate taxes, as you would on your primary residence.
The IRS allows you to rent out your vacation home (or primary home) for up to 14 days a year without paying taxes on the rental income. 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 you never really visit it and rent it out at market value, other tax rules apply. Without personal use, the home is considered an investment or rental property. Any time spent checking in on a house or making repairs doesn’t count as personal use.
Tax deductions for 100% vacation rentals
As an exclusive rental property, you can deduct numerous expenses including taxes, insurance, mortgage interest, utilities, housekeeping, and repairs. Even towels and sheets are deductible and don’t forget about the depreciation write off. Keep detailed records and treat the property as a business. You’ll spend a couple of hours a week, on average, over a year managing the property.
If your modified adjusted gross income is below $100,000, you can deduct as much as $25,000 for rental losses — that is, the difference between your rental receipts and your rental expenses. The deduction gradually phases out between a modified adjusted gross income of $100,000 and $150,000. You can carry forward excess losses to future years or to offset gains when you sell.
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. Remember, rental income is tax-free only if you rent for 14 days or fewer.
The key to maximizing deductions is keeping your annual personal use of a vacation home to fewer than 15 days or 10% of the total days rented, 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), however, and your deductions will be limited.
Another rule to be aware of: 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 but the other expenses will be limited.
IRS closes tax loophole
In the past, owners of vacation homes were able to escape paying capital gains if they sold their vacation property by converting it to their primary residence. The owners would make the vacation home their primary residence by living in it for two years out of the previous five prior to selling thereby qualifying them to exclude gains of up to $250,000 for single filers and $500,000 for joint filers.
While the exclusion remains available, the IRS closed a loophole for vacation homes. For 2009 and later years, regular capital gains tax applies to the portion of the gain that’s equivalent to the time you used the home as a vacation home after 2008.
As an example: You bought a vacation home on Jan. 1, 2002, and it becomes your primary residence on Jan. 1, 2010. Two years later, you qualify for the capital gains exclusion on the sale of a personal residence and decide to sell on Jan. 1, 2012. You will have capital gains taxes on 10% of the gain. Why? Because in 2009 when the change in law occurred, the place was a vacation home. The exclusion is available for the other nine years — 2002 to 2008, when the old rules applied, and Jan. 1, 2010 to Jan. 1, 2012, when the place was used as a primary residence.
Tax deductions for vacation homes are complex, so give us a call if you need help sorting it all out.
About Blackman & Sloop CPAs, P.A.:
Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com
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