There are possible tax implications you should consider and ways to use that vacation home as part of your overall tax plan to optimize your situation.
Summer is upon us! For those of you who have vacation homes, what do you do with it when not using it personally? Do you rent it, or have you considered renting it? If so, there are possible tax implications you should consider and ways to use that vacation home as part of your overall tax plan to optimize your situation.
Here is what you need to know:
Should I Report the Income on My Tax Return?
That depends. Consider the following two questions to help determine that:
- Did you use the home for personal purposes for the greater of 14 days or 10% of the total days rented to others?
- Was the vacation home rented for fewer than 15 days?
If the answer is yes to those two questions, you aren’t required to report the income. Nice and easy.
If that’s not the case, you must divide your vacation home expenses between personal and rental use days. Deductible rental expenses are figured by multiplying total vacation home expenses by the ratio of rental days by total use days.
Vacation home usage:
Personal use days = 20 Rental use days = 40 Total use days = 60 (20 + 40)
Deductibility percentage = 67% (40/60)
Mortgage Interest = 4,500 Real Estate Taxes = 8,500 Homeowner’s Insurance = 1,000
Total expenses = 14,000
Deductible rental expenses = $9,380
The amount of total rental income is then reduced by those deductible rental expenses to figure your taxable rental income on Schedule E of your tax return. The personal use portion of your real estate taxes and mortgage interest can be deducted on your Schedule A if itemizing deductions. In addition to the expenses listed above, you may be able to deduct commissions, advertising, travel and a variety of other expenses as well.
Tax Planning Tips
Take advantage of the income reporting exception. For those who own vacation properties in sought after areas, this can be a great way to boost income without increasing taxes.
The Tax Cuts and Jobs Act imposed limits on the amount of mortgage interest and real estate taxes that can be deducted on Schedule A. If you were impacted by those limits and have a vacation home, let’s look at how we can use that home to your advantage tax-wise.
There are special considerations for real estate professionals that materially participate in the rental activity that potentially allow a larger deduction. Talk to a tax professional to help you determine this.