Real Estate & Taxes:

Rental Deductions for Your Client's Vacation Home

If they are like many other vacation homeowners, they may rent their 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 them 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 they meet some certain standards. Whether or not they can treat their vacation home as a tax haven depends on the following:

  • How often your client rents it out
  • How much personal use they get out of the home
  • How wealthy they are
  • How much rent they collect
  • Who they rent the home to

Renting Less Than 14 Days Per Year
When your client rents their vacation home for less than 14 days per year, they will be eligible to deduct their mortgage interest and property taxes on their vacation home but they will not be eligible for any additional deductions for their rental related expenses. A plus, however, is that any rental income they collect for this time is tax-free and they do not even have to report it on their tax return.

Renting More Than 14 Days Per Year
If your client rents their vacation home out for more than 14 days per year, all of their rental income is subject to tax, including the first 14 days of rent. However, a benefit is that they 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 their rental income if they 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 your client keeps personal use under these limits, they may be able to write off their rental-related expenses to up to $25,000 in excess of the rental income. This tax advantage comes into play because their house is then considered a rental property if they do not spend much time in it. This credit begins to fade out if your client's adjusted gross income exceeds $100,000 and is unavailable if their adjusted gross income exceeds $150,000.

Keep in mind, if they allow friends to stay in their vacation home for free or for less than the fair market rental rate of their home, the IRS forces them to count these days as personal use days. They must therefore add those days onto the number of personal days they have used the house. This could greatly affect their home's rental property status as it could take them above their 14 day/10 % maximum of personal use time and cause them to sacrifice thousands of dollars in rental tax deductions. The same kind of affect holds true when they allow a family member to stay in their vacation home. Regardless of whether or not the relatives pay the full fair market rental price for their house, the IRS forces them to count days spent there by the owner's parents, siblings, grandparents, children, grandchildren, etc as part of their personal time spent in the home.

Limiting their personal use of their 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 their vacation home considered a rental property or second home depends on how wealthy they are, how much rent they collect, how often they use the place, how often they rent it out and who they allow to use their vacation home.