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Don’t Let Your Vacation Home Become a Taxing Experience

Sanford Stolar, CPA and Kevin Wong, CPA
12.14.2017 | Berdon Industry Insights

You just purchased a second residence that you are considering using not only for personal reasons but also to rent to third parties at fair market value. If that is your plan, understanding the tax consequences is paramount. There are certain planning opportunities and tax pitfalls you need to address with your tax advisor.

The reasons for buying a second home vary greatly. Some consider owning a second home for retirement and personal use, while others may decide to rent it during times when they will not be using it. Of course, the tax ramifications vary.

Typically, there are four scenarios which taxpayers need to be aware of — each with unique tax considerations, as follows:

Scenario 1: Vacation home used only for personal reasons

  • Real estate taxes are fully deductible as itemized deductions
  • Mortgage interest from the vacation home is aggregated with the primary residence mortgage interest and may be deductible as an itemized deduction subject to limits.
  • No deductions for depreciation, property upkeep, repairs, etc.

Scenario 2: Vacation home used primarily as a rental

  • Expenses will be allocated based on a ratio between fair rental days and personal use days
  • Certain expenses that are directly attributable to the rental are fully deductible against rental income. This includes but is not limited to advertising and realtor fees. Expenses that are indirectly related to rental use will be partially deductible
  • Losses from the rental are subject to the At-Risk and Passive Activity Loss (PAL) limitations

Scenario 3: Vacation home used primarily for personal purposes and is rented for less than 15 days during the year

  • Income from rentals of less than 15 days are not reportable as income
  • Expenses relating to the rental are not deductible
  • Mortgage interest and real estate tax deductions allowed are the same as vacation homes used only for personal purposes.

Scenario 4: Vacation home rented and used personally for the greater of 14 days or 10% of total fair market value rental days

  • Indirect expenses will be allocated based on the ratio between fair rental days and personal use days
  • Certain expenses directly attributable to the rental are fully deductible
  • Expenses for the rental are allowed up to the amount of the rental income
  • Itemized deductions are limited to the mortgage interest and real estate taxes allocable to personal use of the home

If you do own a vacation home, reach out to your Berdon advisor to discuss the tax ramifications considering your overall tax position.

Berdon LLP, New York Accountants