Talking yourself into a vacation home purchase - part 2
A few weeks ago, I met with a friend over coffee who had the idea to purchase a vacation home for his family to use and possibly to retire to someday.
In part one, we discussed how, of course, you should buy in an area you enjoy vacationing. It is also essential to make a plan, that not only includes a budget but your future intentions. Lastly, it is crucial to examine all the costs as well as the tax consequences, which we will discuss in part two.
Owning a vacation home is not straight-forward when it comes to taxes. It depends on how much you use the property and whether you rent it out.
You rent out the property for 14 days or less and use yourself the remainder of the time
You can rent out your vacation home without claiming the income provided it is not rented for more than 14 days within one year.
You can still deduct the loan interest and property taxes as a second home.
You rent out the property for more than 14 days and use it infrequently yourself
Your vacation home will be considered a rental property if you use the house less than 14 days per year or less than 10 percent of the number of days the home was rented.
If you fall in this category, you would report the rental income on your taxes and will also be able to deduct the expenses to operate including the loan interest, property taxes, insurance premiums, repairs, maintenance, housekeeping, property management fees, and depreciation.
However, you should differentiate between the time the home was used for personal use and allocate the costs accordingly.
A little known fact, you would not count the time you spend at the property performing maintenance as personal time. Just be sure you document your reason for being at the property.
You use the property for more than 14 days and rent it out infrequently
Your second home will be considered your personal residence if you use it yourself more than 14 days per year or more than 10 percent of the number of days it was rented.
If a member of your family uses the home, it would be considered personal use provided you did not charge them rent.
You will be able to claim the loan interest and property taxes on your taxes, but no rental losses.
With the most recent changes in the tax law, you are limited to claiming loan interest on the combined amount of $750,000 in loans on a personal residence and a vacation home that is considered your personal residence.
Additionally, only the first $10,000 of state, local, property, and income taxes can be eligible for deduction.
Please consult with your tax advisor before purchasing a second home. I do not claim to be a tax advisor, and therefore am not an expert in this area.
Burt M. Polson, CCIM, is an active commercial real estate broker. Reach him at 707-254-8000, or email@example.com. Sign up for his email newsletter at BurtPolson.com.