Having a second home to use as a personal retreat is a dream come true for many Americans. However, there are tax consequences that differ depending on how much time is spent for personal use and how much time the home is rented out. To help our clients, prospects and others understand how to calculate and potentially limit tax liability for their vacation home, JLK Rosenberger has provided some key details below.
If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.
If you rent it out for 15 days or more: You must report the income. But what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:
- Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.
- Non-rental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property tax.
Evaluating how you’ve allocated your vacation home use through the mid-year point can help you project how it will be classified for tax purposes. You may be able to affect this by adjusting the number of days you rent it out versus using it personally between now and the end of the year to gain a tax advantage. If you have questions about tax implications for second homes or need assistance with tax planning, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.