Summer time is rapidly approaching. With thoughts of relaxing with your family at your favorite vacation spot, I thought it would be a good time to remind you of the tax advantages of owning a vacation home.
Your second home or vacation property can offer you significant tax advantages. The tax advantages will depend on how often you use the home yourself, how often you rent it out and how long it sits empty.
So let's take a look at the rules......
Personal Residence or Rental Property?
First, you must determine if your second home is a personal residence or a rental property. You have to answer two questions - how often is the home is rented out and how often do you use the home?
Homes that are rented more than 14 days a year and have personal use of more than 14 days or 10% of the rental days (whichever is greater) can be considered a personal residence. Personal use can include use by family members and anyone else who pays less than market rental rates.
If your second home qualifies as a personal residence, you will be able to deduct mortgage interest on up to a $1 million of the mortgage debt and up to an additional $100,000 for home equity loans. Property taxes, of course, are also deductible. You will not be able to deduct depreciation on a personal residence.
As with all income - if you rent your second home out for more than two weeks a year the money you receive from rent is taxable. To reduce taxes on any rent you collect you will want to deduct expenses, so you want to keep excellent records throughout the year. Since the home will have shared personal and rental use, you will need to allocate the costs. You will not be able to claim rental losses in this situation - only zero out your rental income.
If you rent your second home for less than two weeks throughout the entire year you will not have to report any of the income to the IRS - money received for two-week-or-less rental is tax free!
Your second home will be considered a rental property if you do not use it often. For example, if you rent your home for more than 14 days a year and your personal use is less than 10% of the time it is rented out - then you have a rental property.
If your second home is considered a rental property all rental income is taxable. However, you will be able to deduct mortgage interest, property taxes, depreciation and operating expenses based on the total number of days the house was rented out. Operating expenses can include, advertising, management fees, utilities, and cleaning and maintenance.
What can be considered a second home?
Your second home doesn't have to be a house. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities.
As you can see, second homes can offer several tax advantages. Everyone's situation will be different, so please give us a call if you have any questions about a second home you already own or if you are considering purchasing one.