What Deductions Can I Take on a Vacation Home?
Purchasing a vacation home not only gives you a place to go and get away from the stress of everyday life, it also can provide you with some major tax breaks as well. When you own a vacation home, you have the opportunity to take some deductions that lower your taxable income.
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Primarily Used as Vacation Home
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When people buy a vacation home, they sometimes rent it out for part of the year to recoup some of the costs associated with buying the property. If you rent the house out and also use the property for more than 14 days out of the year, the Internal Revenue Service allows you to count the house as a personal residence. When you have a second personal residence, the IRS allows you to deduct the mortgage interest you pay on the property.
Primarily Used As Rental
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If you rent out the house the majority of the time and use the property for less than 14 days out of the year, the IRS counts the property as a rental unit. When a property is considered a rental unit, you cannot deduct the mortgage interest on the property. While mortgage interest is not a deduction in this case, you get to deduct other items. For example, you get to deduct depreciation on the property as well as repairs and advertising expenses.
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Losses on Property
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When you use the property as a rental, the IRS considers it part of a business. If you limit your personal use to 14 days, you then have the option of deducting up to $25,000 in losses on the property. For example, you could spend time maintaining the property and then deduct up to $7,000 in expenses for the property. This could potentially help you reduce your taxable income for the year in addition to making the property more attractive.
Capital Gains Exemption
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When you sell a second home for more than you paid for it, this results in a capital gain. When you have a capital gain, capital gains taxes must be paid. However, if you make the vacation home your primary residence for two years before selling, you could eliminate all the capital gains taxes due. If you are married, up to $500,000 in capital gains taxes can be wiped out when you sell your primary residence. Single individuals can eliminate up to $250,000 in capital gains taxes.
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