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What’s the tax impact of owning a vacation home?

Apr 26, 2016

A vacation home can be a place to relax and recharge with family and friends. It also will impact your taxes, especially if you rent the home to others when you’re not using it. The rules are complex, so you should consult your tax advisor for details, but here’s a brief overview:

Personal use only. If you use the vacation home strictly for personal enjoyment, you typically can deduct your mortgage interest and 100% of your property taxes, just as you do with your primary home. In most cases, the interest deduction is limited to the interest paid on up to $1 million ($500,000 if married filing separately) in mortgage debt for both homes. You also may be able to deduct up to $100,000 ($50,000 if married filing separately) in home equity debt for both properties.

Rent out for fewer than 15 days. In this case, you typically won’t have to report the income and can deduct the same expenses you could deduct if you didn’t rent out the home, such as property tax and mortgage interest. However, you won’t be able to deduct expenses associated specifically with the rental, such as advertising and cleaning.

Rent out for 15 or more days and use it 15 or more days or at least 10% of the days you rent it out. The home will still be considered a personal residence but you must report rental income on your tax return. You typically will need to allocate expenses between rental and personal use, based on the number of days your home is used for each purpose. Expenses attributable to rental use — such as utilities, repairs, insurance and depreciation — can be deducted up to the rental income you earned, although you may be able to carry any excess deductions to future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.

Rent out for 15 or more days and use the home for fewer than 15 days or 10% of the days it’s rented, whichever is greater. You must report the income and can deduct rental expenses. If deductible expenses exceed the revenue you brought in, you can deduct the loss, subject to the complex real estate activity rules. You won’t be able to deduct the portion of mortgage interest attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction. 



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Wipfli Editorial Team

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