VACATION HOME OR RENTAL PROPERTY?

The tax liability of a vacation home depends on the amount of personal and rental use of the home during the year.

Here are the general rules:

  1. If a vacation home is 100% personal, you can usually deduct mortgage interest and property taxes.
  2. If a vacation home is rented for 14 days or less during the year, the rental use is disregarded, the rental income is tax-free, and interest and property taxes can usually be deducted. Note, however, that other expenses related to the rental period are nondeductible.
  3. If a vacation home is rented and not used personally, used by family or anyone who does not pay full market rent, it is treated as rental property and interest, taxes, operating expenses (utilities, maintenance, etc.), and depreciation are deductible. Rental losses up to $25,000 may also be deductible, though limited by passive loss rules, especially if the taxpayer's adjusted gross income exceeds $100,000. Any passive losses disallowed can be carried-over to future years.
  4. If a vacation home is rented for more than 14 days and used personally, one of the following applies: A) If the personal use of a vacation home does not exceed the greater of (1) 14 days, or (2) 10% of rental days, then the vacation home is considered to be a rental property and taxes and interest must be allocated between rental and personal use. The taxes and interest belonging to the personal use part of the year are non-deductible. B) If the personal use of a vacation home does exceed the greater of (1) 14 days, or (2) 10% of rental days, then special vacation home rules apply and the portion of taxes and interest belonging to the personal part of the year can be deducted. The portion of taxes and interest belonging to the rental part of the year can be subtracted from the property's rental income. The remaining rental income can be offset, but not exceeded, by operating expenses and depreciation. Any disallowed rental expenses are carried forward to future years.



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