Exploring Vacation Home Tax Rules

Posted by Madison on March 29, 2011

Now that everything is moving quickly on our new vacation home rental, it’s time to talk tax!

There are three high level categories for vacation home tax rules based on how often your rent your home and how often use it personally.

Rent a Little

When You: Rent Your Home 14 Days or Less

If you rent your home for less than 15 days a year, there are no federal taxes due on the rental income. In fact, you don’t even have to report the rental income on your tax return. You can still deduct the mortgage interest and property taxes on Schedule A, but no other deductions.

This is the perfect scenario for my in-laws who live close to the Kentucky Derby. I’ve been trying to convince them to rent out their home for the weekend. Houses rent at a premium for that weekend, and because the rental will be less than 15 days, the income will be tax free.

Rent a Lot, Use a Lot

When You: Rent More than 14 Days & Use Personally More than 14 Days

When you use your vacation home more than the greater of 14 days or 10% of the total rental days, your vacation home will be considered a dwelling.

You’ll be able to take vacation home deductions (prorated between the personal and rental use), but only to the extent of rental income. You can’t take a loss in this category for the current tax year.

However, you can still deduct the prorated mortgage interest, property taxes, and casualty losses on Schedule A.

Rent a Lot, Use a Little

When You: Rent More than 14 Days & Use Personally 14 Days or Less

If you limit the personal use of your vacation home rental (not more than the greater of 14 days or 10% of rental days) and you rent it more than 14 days annually, you’ll land in this category.

You can use the following vacation home tax deductions to offset rental income:

  • Mortgage Interest
  • Property taxes
  • Casualty losses
  • Maintenance
  • Utilities
  • Insurance
  • Depreciation

The expenses are first subtracted from the vacation rental income on Schedule E. If you have a loss, you might be able to deduct $25,000 in losses if your AGI is under $100,000 (or partial deductions for up to $150,000 AGI) and you meet the other passive activity loss rules like active participation. If you can’t take the losses, they’ll carry forward into future years.

However the vacation home tax advantages in this category are a double edged sword, you’ll give up the personal portion of the Schedule A mortgage interest deduction in this category.

More Vacation Home Tax Rules

The categories above are the general rules; there are some extra vacation home tax rules to explore that aren’t so straight forward and require some extra tax planning. I’m working on putting together the advanced vacation home tax strategies for the future.

For example, one sticking point in the second home tax rules that will trip us up is the average rental period. If the average rental at your vacation home is less than 7 days, the vacation home isn’t considered a rental. That means we’ll have more stringent participation rules (material participation, which is hard to meet when you have a rental management company); if you don’t meet those the losses aren’t allowed if you don’t have other passive income.

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