Vacation Home, Rental Property or Personal Residence?

Your Guide to State, Local, Federal, Estate + International Taxation

Okay, so you have a second home. That’s great! Now what? Well, this is a common tax issue since so many people are buying second homes. However, you may not be sure if your second home is considered for tax purposes as a vacation home, a rental property, or a personal residence. According to the IRS, the answer is based on the amount of time that you use your home and the amount of time that you rent your home.

Here are the three timing differences that will determine the type of property you have:

Properties rented 14 days or less a year

If you bought a second home purely for personal enjoyment and rent it out less than 15 days a year, than it is considered a vacation home for tax purposes. You can generally deduct your mortgage interest and real estate taxes, as you would on a primary residence. You will itemize them by filling out a Schedule A, and hope that your itemized deductions end up greater than the standard deduction. As a bonus, the tax law even allows you to rent out your second home for up to 14 days a year without paying taxes on the rental income. (Nice!) Of course, you will not be able to deduct any of the rental-related expenses either.

Properties rented for 15 days or more AND the owner uses it less than 14 days

Whether you bought your second home to rent for a week, a month, or a year at a time – it is treated all the same – as a rental property. Rental property income and expenses are reported on a Schedule E as passive activity (subject to §469 passive activity rules). Typical expenses related to rental properties include insurance, maintenance, mortgage interest, property taxes, utilities, and depreciation. The amount of rental expenses that can be deducted is based on the percentage of days the vacation home was rented out for the year. Owners may be able to deduct up to $25,000 each year in losses, depending on their AGI. In addition, passive losses can be written off if the owner personally manages the property.

Owner uses the property for the greater of: more than 14 days or 10% of the total days the home was rented

If personal days exceed 14 days or 10% of the number of days the home is rented (whichever is greater), the IRS considers the property a personal residence and rental loss cannot be deducted. Rental expenses, up to the level of rental income, as well as property taxes and mortgage interest can still be deducted.

Lastly, there is always more information that needs to be considered when dealing with the complicated tax code. Consult your local tax professional who can easily guide you through this process. For more information, read Publication 527-Residential Rental Property.

By Stacy Redmond