Owning a vacation home can offer more than just a relaxing escape or an investment opportunity. With proper planning, vacation homes can help create tax benefits. Whether you're considering buying a vacation property or have an existing vacation home, there are several tax strategies to keep in mind.
Some lesser-known types of qualifying vacation or "second homes" include boats, motor homes, timeshares, and trailers. Three requirements must be met to qualify as a second home: each must have sleeping, cooking, and toilet facilities. If your camper has these amenities, you have a second home for tax purposes.
Owners of vacation homes face a set of tricky tax rules. How these apply to you depends on your personal and rental use of the home during the year. Here are the general rules:
100% personal use. If you never rent out your vacation home, you can generally deduct mortgage interest and property taxes. Or, if you rent it out for 14 days or less, the rental use is disregarded. The rental income is tax-free and any expenses related to the rental period are nondeductible.
100% rental use. If the home is rented without personal use, it's treated as rental property. (Personal use means use by your family or anyone who doesn't pay full market rent.) With rental property, you can deduct interest, taxes, operating expenses (utilities, maintenance, etc.), and depreciation. However, your current loss deduction may be limited by the passive loss rules.
Mixed personal and rental use. If there are more than 14 rental days and personal use doesn't exceed the greater of 14 days or 10% of rental days, you have a rental property so therefore interest and taxes must be allocated between rental and personal use. If there is a rental loss, it may not be currently deductible because of the passive loss rules, and the interest allocable to the personal use part of the year is not deductible. If personal use exceeds the greater of 14 days or 10% of rental days, special vacation home rules apply and you can generally deduct interest and taxes. The rental income is reduced by allocable interest and taxes. Remaining rental income can be offset but not exceeded by operating expenses and depreciation. Disallowed rental expenses are carried forward to future years.
Although the tax rules concerning vacation homes are complex, it may be worth the effort to optimize your tax benefits. Sometimes it's better to use the home more often, sometimes less often. Contact us for help in reviewing the rules as they apply to your specific situation.