Many people use the terms "vacation home" and "rental property" interchangeably as if the two are synonymous. However, the Internal Revenue Service treats the two types of properties very differently and taxes due on a rental property are often significantly higher than those due on a vacation home. A homeowner who actually spends a few weeks each year in the rental can, for tax purposes, call it a vacation home.
If you own a property that you use seasonally -- as a second residence or allow family members and relatives to stay in rent free -- for tax purposes you can call it a vacation home. If you rent the home but stay in it yourself for more than 10 percent of the number of days that you rent it, or more than 14 days a year -- if that exceeds 10 percent of the rental period -- you can also classify it as a vacation home.
If you own a property and exclusively rent it out, you must report it on your taxes as a rental property. If you stay in the home no more than 10 percent of the the number of days that you rent it or no more than 14 days a year, you must report the house as a rental property for tax purposes. Depending on your tax bracket, you can deduct up to $25,000 per year from your taxes as a loss if the rental income does not cover the cost of maintaining the home.
Vacation Home Taxes
Vacation homes are taxed the same way as primary residences, which means you can deduct interest payments on loans of up to $1 million from your taxable income. You can only deduct interest, though, for months when you were using the home or it was unoccupied, but you can classify the interest on the other months as an expense. Additionally, many states have homestead exemptions from property taxes, and in some areas, if you are married, you and your spouse can claim homestead exemptions on different properties. One of you can claim the primary home and the other can claim the vacation home.
When you apply for a mortgage, rates are lower on primary residences and second or vacation homes than on rental properties. Lenders assume that borrowers are more likely to default on loans tied to properties which are purely used as rental homes. Typically, you should expect to pay between a half to one percent more on a rental home mortgage rate than on a vacation or primary residence loan.
Primary Residence Vs. Rental Property Taxes
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IRS Rules for Deductibility for Personal Use of Rental Properties
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