If you are like many other vacation homeowners, you may rent your vacation house out part of the year in order to help make those mortgage payments a little easier. What many do not realize however is that renting can also yield you some extra tax benefits. Most vacation homeowners can qualify for the same tax benefits afforded to landlords who own conventional rental properties, as long as you meet some certain standards. Whether or not you can treat your vacation home as a tax haven depends on the following:
Renting Less Than 14 Days Per Year
When you rent your vacation home for less than 14 days per year, you will be eligible to deduct your mortgage interest and property taxes on your vacation home but you will not be eligible for any additional deductions for your rental related expenses. A plus, however, is that any rental income you collect for this time is tax-free and you do not even have to report it on your tax return.
Renting More Than 14 Days Per Year
If you rent your vacation home out for more than 14 days per year, all of your rental income is subject to tax, including the first 14 days of rent. However, a benefit is that you are allowed to write off utilities, maintenance, depreciation and other rental-related expenses up to certain limits. Rental expenses can be deducted to the extent of your rental income if you personally use the home more than 14 days a year or 10 % of the number of days it is rented out, whichever is greater. However, if you keep personal use under these limits, you may be able to write off your rental-related expenses to up to $25,000 in excess of the rental income. This tax advantage comes into play because your house is then considered a rental property if you do not spend much time in it. This credit begins to fade out if your adjusted gross income exceeds $100,000 and is unavailable if your adjusted gross income exceeds $150,000.
Keep in mind, if you allow friends to stay in your vacation home for free or for less than the fair market rental rate of your home, the IRS forces you to count these days as personal use days. You must therefore add those days onto the number of personal days you have used the house. This could greatly affect your home's rental property status as it could take you above your 14 day/10 % maximum of personal use time and cause you to sacrifice thousands of dollars in rental tax deductions. The same kind of affect holds true when you allow a family member to stay in your vacation home. Regardless of whether or not the relatives pay the full fair market rental price for your house, the IRS forces you to count days spent there by the owner's parents, siblings, grandparents, children, grandchildren, etc as part of your personal time spent in the home.
Limiting your personal use of your vacation home in order to be able to use rental property tax deductions usually does not benefit those whose adjusted gross income exceeds $150,000. These individuals usually benefit more tax-wise by having their home considered a second home as opposed to a rental property. This is because wealthier owners stand to lose more in mortgage interest deductions than they will gain in rental deductions because mortgage interest can only be fully deducted if the vacation home qualifies as a second home, else only a portion of mortgage interest is deductible.
Therefore, one needs to take several factors into consideration before figuring which avenue is best to take when it comes to receiving a tax break on their vacation home. Factors that affect whether it is beneficial to try to have your vacation home considered a rental property or second home depends on how wealthy you are, how much rent you collect, how often you use the place, how often you rent it out and who you allow to use your vacation home.