What’s the Tax Impact of Owning a Vacation Home?

A second home or vacation property can be a place to unwind and revive with your family and friends. This home will however affect your taxes, particularly if you rent the property to guests when you’re not occupying it. The rules are not simple, so you should turn to your tax advisor for information, but here’s a short summary.

Personal use only. Just as you do with your primary residence, you will be able to deduct your mortgage interest and 100% of your property taxes, if the vacation house is only for personal use. In most circumstances, the interest deduction is restricted to the interest paid on up to $1 million ($500,000, if married and filing separately) in mortgage debt for both homes. You may also be able to deduct up to $100,000 ($50,000, if married and filing separately) in home equity debt for both residences.

Rent out for fewer than 15 days. In this situation, you usually will not be required to state the income and can deduct the same expenditures you would deduct if you didn’t rent out the residence, such as property tax and mortgage interest. However, expenditures related explicitly to the rental, such as advertising and cleaning, will not be allowed to be deducted.

Rent out for 15 or more days and use the home for 15 or more days, or at least 10% of the days you rent it out. The rental property will still be categorized as a personal residence, but you are required to record the income from the rental property on your tax return. Based on the amount of days your home is used for each function, you usually will need to allocate expenditures between rental and personal use. Expenditures creditable to rental use — such as utilities, repairs, insurance and depreciation — can be deducted up to the rental income you earned, however, you may be able to carryforward those additional deductions to subsequent years’ returns. You are also able to take an itemized deduction for the personal portion of both mortgage interest and property taxes.

Rent out for 15 or more days and use the home for fewer than 15 days, or 10% of the days it’s rented, whichever is greater. The income is required to be recorded and you may deduct rental expenditures. If your deductible expenditures surpass your revenue received, you are able to deduct the loss, subject to various intricate real estate activity rules. You will not be allowed to deduct the portion of mortgage interest creditable to your personal use of the residence, but you are able to take the personal portion of property tax as an itemized deduction.

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