How You Use Your Vacation Home Makes a (Tax) Difference

January 27, 2021

By King Cheng

It’s fun to have a vacation home. It may not be as fun, however, to figure out how to file your taxes regarding your beloved holiday abode. Below are a few tax-filing considerations with which to familiarize yourself.

Personal Use

The IRS has a rather broad definition of personal use. Besides the days that you use the property personally, any days donated to a qualified charitable organization for sale at a fundraising event and used by the “purchaser” or days rented to family members and friends for under a fair rental are also considered personal use.

However, it is not considered personal use if the property is rented as a main home to family members or friends. Also, days spent at the property on repairs and maintenance do not count as personal use.

Vacation Home vs. Investment Property

Days of personal use is the primary factor that determines whether your vacation home is a personal residence or rental property:

  • Your property is considered a personal residence if personal use of the property is for a number of days that exceeds the greater of (i) 14 days; or (ii) the number of days that it is rented at a fair rental to others in the year.
  • If the property is rented for 14 days or less, you do not have to report any rental income or rental expenses on Schedule E. You do report qualified mortgage interest and real estate taxes on Schedule A.

On the other hand, if the property is rented for 15 days or more, it is a dwelling unit used as a home and IRC Sec. 280A applies. You must report income and prorate expenses between personal and rental use. Prorate expenses by using this formula: Number of days rented/total number of days used for personal and rental.

Deduct the personal portion of qualified mortgage interest and real estate taxes on Schedule A, and report the rental portion of interest and taxes on Schedule E. Other expenses of operating the home (e.g., advertising, legal fees, commissions) and depreciation can also be deducted. However, such expenses are subject to ordering rules and cannot create a loss. Disallowed operating expenses and depreciation are carried forward to future years.

If your property is not used long enough to be treated as a personal residence, then it is considered a rental property:

  • You must report rental income and prorate expenses between rental and personal use. Report rental income and prorated expenses on Schedule E and the personal portion of real estate taxes on Schedule A. Mortgage interest allocated to personal use in this case is considered personal interest and is not deductible because it is not qualified residence interest.
  • Depending on your modified adjusted gross income, your passive loss from the rental activity may be limited or you may be qualified to deduct up to $25,000 passive losses against non-passive income.

Et Cetera

If you use rental services, like Airbnb, look for any Form 1099s issued to you. Keep good record of the days your vacation home is rented and the days used personally, as well as your expenses associated with the property. Provide the information to your tax advisor at the time of tax filing.

Some state and local governments may collect sales or hotel taxes on vacation rental property. It is best to consult your tax advisor on any filing requirements.

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