Tax Breaks For Vacation Home Owners

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February 22nd, 2008

Its no secret that many vacation and second home owners here at Deep Creek Lake greatly enjoy the peace and relaxation that comes along with owning real estate in Garrett County — but there are other benefits to owning a second home that sometimes go unnoticed — most notably the various tax breaks allowed by the IRS.

In simplistic terms, the IRS allows most second homes to be treated in one of the  following three ways — depending mostly on how much you use or plan on using the property;

1. for personal use
2. as a rental property
3. or a combination of the two

If you truly use your Deep Creek Lake property as a vacation home for personal use as defined by the IRS there are a couple of tax breaks you may be able to receive. The IRS stipulates that a property is considered one for personal use if during the tax year the owners occupied it more than the greater of 14 days or 10% of the total days it was rented to others at a fair rental price.

• If your vacation home is classified by the IRS as one that is used for personal use — you can actually rent it out for 14 days or less each tax year and NOT have to report any rental income  — this is essentially tax free income — but conversely in this scenario you wouldnt be able to deduct any rental expenses incurred during the days rented either.
• Also, if you fall into this personal use category, all property taxes and mortgage interest on your second home can be deducted if the total amount of mortgages against your primary residence and second home is $1 million or less.

Renting Your Property Out

Their are certain tax breaks as well for those owners who decide to rent out their vacation homes and personally use it less than 10% of the rental each year. If you fall into this rental classification by the IRS you must report all rental income — however, the good news is that the IRS allows you to deduct all legitimate property expenses associated with owning the home — like taxes, utilities, homeowners insurance, HOA dues, maintenance, and depreciation. Some vacation home owners can legally show a deductible tax loss which could ultimately reduce the total amount of taxes owed to the IRS.

Combination of Personal Use and Renting It Out

If you combine personal and rental use — you can deduct the appropriate percentages of expenses based on the amount use. For example, if you use your second home 40% of the time for personal use — you can deduct 60% of the expenses if it is truly rented out that percentage of the year. Important point here though — remember if you rent it out more than 14 days you must report ALL rental income.

The $500,000 Capital Gain Exclusion

If you know you are going to sell your vacation home at some point in the future and will probably have some type of sizable gain you may be able to qualify to exclude up to $500,000 in capital gains on your second home sale. This is accomplished by turning your second home into your primary residence. How do you do that? Well, the only way to do this and stay within the IRS rules is to make your second home your primary residence for two of the five years prior to the sale. Obviously, this takes some long-term planning and foresight to accomplish but it could mean a tremendous tax savings in the long run.

Disclaimer! Please note this post in no way is meant to give out tax advice. It is strictly to provide some basic (and we stress the word basic) ground work about second home ownership and how it relates to income taxes. Everyones tax situation is different. You must consult your CPA, tax planner, or attorney to make sure you are properly following the IRS rules as they pertain to second home ownership before proceeding.

This entry was posted on Friday, February 22nd, 2008 at 5:42 pm and is filed under Deep Creek Lake Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response. or trackback from your own site.

4 Responses to Tax Breaks For Vacation Home Owners

Wow what a great post I learned alot. I need to update friends who have a vacation rental property to see if they are taking advantage of the tax breaks.

These are all great things to know when considering buying a vacation rental property. Informative post thanks!

I have always wanted to get a vacation property and this post brings up some things to consider when doing this type of purchase. Great post thanks for the info.

Great explanation of how vacation homes rentals can receive tax breaks. I saw a blog stating that hotel rates are high because of lack of rooms and vacation rentals are being considered where previously they werent. They were also talking about vacation rentals in urban areas also not just resort areas.

So many reasons to invest in a vacation rental and with now being the best time to a foreclosure property.