Sometimes taxpayers that own vacation homes miss out on some valuable tax breaks. This may impact you because believe it or not, the IRS considers many types of dwellings a vacation home: house, condo, co-op, RV, house trailer, and even a boat with cooking, sleeping, and restroom amenities. What are the potential tax breaks and should I also consider renting it out?
What can I deduct?
Similar to a mortgage on your first home, you can also deduct the interest on your second home which includes points. Unfortunately, buying a plot of land with only plans to build a home later on isn’t an eligible deduction. Other deductions include property taxes and if you plan to rent it out then the maintenance costs (utilities, depreciation, insurance etc.); more on that in a minute.
What if I rent out the vacation home?
There are limits on the tax breaks you can claim when your vacation home is both a residence and a rental property. For instance, if you regularly rent out your vacation home and do not personally use it for at least 14 days or 10% of the number of days you rent it out, you cannot take the deduction for home mortgage interest on a Schedule A. Rather, you would need to report the rental income on Schedule E of your form 1040 and claim a pro-rated amount of rental expenses. This would include costs associated with putting the property in service or managing and maintaining it such as: mortgage interest payments, repairs that aren’t improvements, depreciation expense, administrative expenses, property taxes, insurance premiums, management fees, professional fees and supplies.
If you own property that you use as a vacation home and you rent it fewer than 15 days during the tax year, you do not have to include the rent you receive in your income but that means you wouldn’t be allowed to claim all of the rental expenses previously mentioned. But, you are still allowed to take the deductions for the interest, taxes, and (if applicable) casualty and theft losses.
What if my second home becomes rental property and I have a loss for the year, can I deduct it?
Since rental properties are generally considered passive activities, you are likely limited to offsetting your losses with other types of passive income. However, if you actively participate by owning at least 10% of the property and you make management decisions, then you could offset up to $25,000 of losses with other income. There’s a catch though. The amount of losses you can offset with other income decreases by $0.50 for every dollar that your modified adjusted gross income (MAGI) is greater than $100,000. If your MAGI is $150,000 or greater, then you would lose the entire $25,000 deduction.
More Questions? Browse Answers or ask your rental property tax questions online.
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