Tax Rules for Vacation Homes
If home ownership is part of the American dream, owning a vacation home may well be the icing on the cake. Not only is a vacation home a way to get away from it all and relax, you can also build wealth by holding on to the property and gaining substantial value in the price of the home. Lastly, you can rent the home out as a rental property when you're not using it. The tax rules can be tricky when you're renting out a vacation home part of the time and enjoying it yourself the other.
Other People Are Reading
-
Vacation Home vs. Business or Investment Property
-
If you don't rent out your vacation home to others, the IRS considers the property to be just like any other home, and you qualify for mortgage interest and property tax deductions on Schedule A, Itemized Deductions. If you do rent your house for 14 days or less, your rental income does not need to be reported. According to Bankrate.com, absent your own personal use, the home is considered a business or investment property and not a vacation home. Time that you spend checking on the property doesn't count as personal use of the home.
Use Requirements
-
The IRS requires you to use your vacation home more than 14 days each tax year or your use must exceed 10 percent of the total time the home is rented, whichever period of time is greater, to take the mortgage interest deduction. If you rent the house and use it yourself, the IRS requires you to prorate your mortgage interest and property taxes between Schedule E, Supplemental Income and Loss, and Schedule A. If you rent the vacation home out for more than 14 days, you must report all rental income. You can deduct numerous expenses, including linens, if they are supplied for renters.
-
Record Keeping and Deductions
-
If your vacation home is used as a rental, maintain a separate bank account and keep detailed records of your business. To maximize your deductions, you must prove to the IRS that you are actively involved in the rental vacation home. You also must own at least 10 percent of the property to qualify for deductions.
Losses
-
The IRS will allow you to deduct up to $25,000 in rental losses to offset your income if your adjusted gross income is $100,000 or less. As your income level rises, the deduction allowance eventually disappears between $100,000 and $150,000. Any passive losses that you can not deduct in the tax year can be stored and used to offset profits when you sell the vacation home.
-
