Income Tax Issues With Vacation Homes


Some of the tax deductions permitted for a primary residence are also available for a vacation home. But the reporting of these expenses depends upon whether the vacation home is occasionally rented. A taxpayer is best assured of following the tax reporting procedure applicable to his situation by using the services of a tax enrolled agent.

The Internal Revenue Service permits taxpayers to deduct mortgage interest and property taxes on two locations. This allows the deductions for both a primary residence and a second home-such as a vacation property-on Schedule A of a taxpayer's personal return. For example, an Orange County resident may have a second home in Palm Springs. A CA enrolled agent is trained to sort out the information related to tax deductions on both locations.

A taxpayer can also rent his vacation home to others when he's not personally using it. Rental income is not taxable on vacation property rented for two weeks or less per year. No tax deductions as a landlord are permitted. However, the mortgage interest and property taxes on the vacation home are deducted just as if the property had not been rented during the year.

Special accounting is required if the vacation home is rented for more than 14 days per year and is occupied by the owner for just one day in the same year. Such circumstances are covered in enrolled agent CPE. In these cases, the expenses for the home are divided into two categories-personal use and rental use.

The number of rental days as a percentage of the entire year is calculated first. This percentage is then applied to the expenses for the vacation home to determine tax deductions as a rental property. Some EA hours address computation of these deductions. The rental expenses are deducted against the reportable rental income on Schedule E of the taxpayers return.

The only tax-deductible expenses for the personal use period are mortgage interest and property taxes and casualty losses. These are claimed on Schedule A as normally occurs if there were no reportable rental income.

One of the benefits to taxpayers using the services of someone with EA certification is assurance that all deductions are captured on the correct reporting forms. Deductions are permitted on Schedule E for the rental percentage of insurance, utilities, and maintenance. In addition, the entire amounts paid for expenses directly related to renting are deductible. This includes, for example, advertising and commissions.

Restrictions apply when a taxpayer uses a vacation home for more than 14 days per year or 10 percent of the days it was rented, whichever is higher. In that case, a tax-deductible loss is not available when the rental expenses for this mixed-use property exceed the rental income. However, the excess expenses are carried over to the next year. This restriction doesn't apply for properties converted during the year from rental to personal residence.

Vacation homes involve a lot of tax details. Individuals who meet EA CPE requirements have obtained the knowledge to resolve these issues to a taxpayer's advantage.

By: Sawyer Adams