The vacation home conjures images of relaxation and fun. But there may be yet another factor to bring enjoyment: potential tax benefits. Savvy homeowners can transform their vacation abodes into strategic financial assets. In this article, we delve into the intricacies of leveraging your vacation property for tax advantages while ensuring compliance with tax regulations.
The financial principle is simple: rent out your vacation home during periods of non-use to mitigate its costs. In certain scenarios, the rental income generated can effectively cover all expenses associated with the property, including mortgage payments. This strategy effectively transforms your vacation home into a valuable asset, requiring minimal effort or ongoing cash outlay on your part.
However, there are no free lunches – making money from renting your vacation home will generally be considered rental income, and result in additional tax expense. This is where knowledge of what’s allowed to be deducted (and what may disqualify any tax write offs, altogether) is critical.
In general, if you receive rental income for the use of your vacation home, you may deduct certain expenses. However, using the home personally more than a specified amount mayqualify the property as a personal residence, at which point your deductions become limited.
If you use your rental vacation home for personal purposes during the tax year for a number of days that’s more than the greater of:
- 14 days, or
- 10% of the total days you rent it to others at a fair rental price,
… then the deduction limitations begin to apply. In this case, you generally must bifurcate your total expenses between the rental use and the personal use based on the number of days used for each purpose. Note –certain expenses allocated to your personal use of the property may still be deductible as investment expenses, but they will typically be significantly less than what a rental property can deduct.
There are nuances to what can constitute personal use, including family members’ usage, swapping vacation time with another property, and anyone paying less than the fair market rental price.
Generally, the types of deductible expenses on your rental vacation home may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation. Mortgage payments are not deductible, but this is essentially the role of the depreciation deduction on the property. There also may be planning opportunities around renovations, A/C system replacements, etc.
Contact us today to discuss your vacation home’s potential tax benefits.
