If you're thinking about using your vacation home this summer, make sure you consider maximizing any tax breaks available to you before you plan your trip.
If you're thinking about using your vacation home this summer, make sure
you consider maximizing any tax breaks available to you before you plan
If you rent out your vacation home and personally use it no more than 14
days a year or 10 percent of the total days it is actually rented out, whichever
is greater, the property is considered investment property. As a result,
your expenses for this property, including utilities, repairs, property
taxes and mortgage interest, are fully tax deductible.
However, if your personal use exceeds those parameters, the amount you can
deduct for rental expenses is limited. Your investment expenses are deductible
only to the extent of gross income, which means you cannot claim a loss.
Any disallowed excess deductions are carried forward to future years.
For example, say you plan to rent your vacation home for 12 weeks (84 days)
at $1,500 per week. Your total rental income is $18,000. You typically spend
three weeks at your vacation home. The expenses associated with renting
your property come to $25,000, so you have a $7,000 loss. You cannot deduct
it because spending three weeks per year at your property means you exceed
the 14-day/10 percent limit. If you reduce your personal use by just one
week, you conform to the 14-day/10 percent limit and can claim the $7,000
Be careful though: When the property is used by you or a family member — even if you're just letting a relative stay over the weekend — it counts
as a personal-use day. However, time spent fixing or cleaning your vacation
home doesn't count as personal use if that's your primary reason for being
there, even if you bring the whole family along.
Of course, you still are constrained by "passive activity" rules, which
means you can use your real estate rental losses only to offset passive
income unless you "actively participate" in managing or operating the rental
property. Then you can apply up to $25,000 in rental losses against regular
income. The $25,000 offset is phased out for adjusted gross income between
$100,000 and $150,000. Active participation means regular and substantial
involvement, such as approving tenants, arranging repairs and deciding on
If you never rent out your vacation home, you can collect a quick tax break
without becoming a landlord. If you rent it out for two weeks or less during
the year, you do not have to report the rental income on your tax return.
Of course, you cannot claim any deductions for maintenance or depreciation
either. This break is not limited to vacation homes. If you rent out your
home to someone while you are away vacationing in Europe, whatever rental
income you receive is tax-free, as long as the rental period per year is
two weeks or less.
—Zall is a freelance writer based in Silver Spring, Md., who specializes
in taxes, investing and business issues. He is a certified internal auditor
and a registered investment adviser. He can be reached via e-mail at firstname.lastname@example.org.
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