Basic Guide for Taxes on Vacation Homes

Having a vacation home is an expense few families can afford.  Understand the various tax breaks and possibility of making your vacation home pay for itself by renting it out to vacationers when you’re not using it yourself, and the door of owning a vacation home is suddenly opened for a much larger population.  Here’s what you need to know about taxes on vacation homes – and some tips for making a vacation home more affordable:
Even if you don’t rent out your vacation home to others, you can write off mortgage interest and property taxes just like you do your primary residence.

If you do rent out the vacation home when you aren’t using it yourself, you’re then considered a business owner (landlord) and can deduct a portion of the home’s utilities and maintenance as well.  If your modified adjusted gross income is under $100,000, you can write off rental losses up to $25,000.

The tax rules for vacation homes vary depending on how often you use the vacation home:

• Homes Rented for More than 14 Days per Year / Personal Use More than 14 Days per Year: a vacation home that is rented out more than 14 days a year but is also used by you and/or your family for more than 14 days a year is considered a personal residence.  At tax time, you can deduct mortgage interest up to $1 million on two residences.  You can deduct expenses for your use of the home, as well as expenses incurred when you rent it out.  You use a Schedule E at tax time to report the rental income, and the percentage of interest, taxes, and expenses that are deductible.  A tax professional can help you with these deductions, as they can become complicated.
• Homes Rented for More than 14 Days per Year / Personal Use Less than 14 Days per Year: homes that are rented out more than 14 days each year and used personally less than 14 days a year are considered rental properties.  Interest, operating expenses and property tax deductions are subject to the number of days the home was used, and then split based on how much was personal use and how much was rental use.  If you don’t make enough through the rental of the home to offset the costs of renting it, you can show a taxable loss on a Schedule E at tax time.  You can’t deduct property tax on a rental home, so in some cases it may be worth it to use the home more (to have it classified as a personal residence rather than a rental home) so you can deduct your property taxes.
• Homes Used for Personal Use More than they’re Rented Out / Rented Less than 15 Days per Year: if you use your home more than 14 days a year and you rent it less than 15 days a year, the home is classified as a second personal residence and you do not have to claim rental income.  The tax rules are all the same as they would be for your primary residence.  There are no write offs for operating expenses, but you can still claim property tax deductions and mortgage interest.