Tax Deductions for Vacation Homes

The Malibu Life December 7, 2023

Tax Deductions for Vacation Homes

Vacation homeowners have many opportunities to save on homeownership expenses by applying for tax deductions. If a property qualifies as a vacation home, homeowners can make money back for expenses ranging from classic property taxes to passive losses. Here’s everything you need to know about deducting vacation home expenses.

Is your vacation home a vacation home?

To qualify for certain tax deductions, a vacation home has to follow a few guidelines. First, it can only be rented out for fewer than 15 days out of the year. Homeowners who do so can keep rental revenue without having to report the income. If vacation owners do rent out the property, deductions can’t be made for related expenses.

A vacation home must also qualify as a residence by having basic living accommodations. A residence has living accommodations if the property includes cooking facilities, bathroom facilities, and a sleeping space. Traditional spaces like a house or apartment apply, as well as more non-traditional properties like a houseboat or motorhome.

Residences must also be used personally for at least 14 days or 10% of the total days the property is rented at a fair rental value. A home can be personally used by an owner (excluding renters in a shared equity financing agreement), family members of owners, and people who pay less than fair rental value to use the property (excluding employees at an employer’s residence). Use of a property under a home-exchange agreement also counts towards personal use.

Tax deductions for rental owners

Vacation homeowners who rent out their property can still qualify for tax deductions even if they rent out the property for more than 15 days. The key to deducting vacation home expenses is to treat a property like a business. Keeping detailed records and a separate account for costs makes it easier to manage deductions. Here are a few traditional deductions rental owners qualify for and a few that often go missed.

Traditional deductions

Traditional deductions like property taxes and property repairs can be deducted from a vacation property that’s used for renting. These deductions have relatively few limitations for rental owners. Expenses like mortgage interest, insurance, and most utilities can also be deducted. As a home naturally wears over time, rental owners can deduct its depreciation.

Other costs related to the marketing side of renting can also be deducted. Services used to manage a property, such as placement fees, can be deducted. Keep track of legal fees, bookkeeping services, advertising, and travel expenses related to business.

Commonly missed deductions

When used correctly, applying for deductions that are out of the ordinary can also save vacation property owners some money. Certain property improvements related to roofing, fire protection, select HVAC updates, and security systems are all eligible for tax deductions. Those who use a credit card for expenses can deduct credit card interest. This is when it’s helpful to separate personal and rental finances, as expenses must be clearly used for business.

In the past few years, home office deductions have become increasingly relevant and may apply to a vacation rental if it’s operated correctly. Lastly, any real estate loss is considered a passive loss, which typically isn’t deductible. However, renters making under $100,000 can qualify for up to $25,000 in deductions each year.

Mixed use of a vacation home

When using a vacation home personally and as a rental property, renters need to keep the 10% rule in mind to qualify for most deductions. In other words, a vacation home should only be used one day per 10 days of renting. When renting out a vacation home for 180 days, keep personal use at 18 days.

If a vacationer uses the property for more than 10% of the rental days, they only qualify for a percentage of the deductible. To do this, homeowners need to calculate the personal and rental use ratio. Here’s a look into the two most common ways people with a vacation home rent out their properties.

Short-term vacation rental

The short-term vacation rental is ideal for vacation homeowners looking for extra cash to supplement their income without having to pay income taxes on the revenue. Short-term renters can rent out their property for two weeks or less without having to record it, and this is most advantageous for locations that see spikes in tourism for yearly events or festivals. Short-term renters can qualify for deductibles related to mortgage interest for up to 750,000 of debt and $10,000 of real estate taxes.

Investment property vacation rental

Those interested in making a more serious profit with their vacation home need to limit the amount of personal use to 14 days or 10% of the rental time. This time is always calculated on a yearly basis. In a regular year, renters under this category can personally use their vacation property for no more than 36 days.

Although the rental revenue will be taxed, renters qualify for many more tax deductions than short-term renters. Consider passing off responsibility to others for the largest amount of tax benefits. Having a property manager or a real estate LLC is a great way to make serious gains.

When deducting vacation home expenses, renters should also keep in mind the difference between federal income tax and lodging tax. Only income taxes are deductible, as lodging taxes are paid by guests. Even though a renter isn’t paying lodging taxes, they’re still responsible for collecting them for state and local authorities.

Ready to purchase a vacation home?

Deducting vacation home expenses is a great way to make extra money with a vacation property. Properties must be used as vacation homes in terms of personal use and basic living accommodations to qualify for most home deductions. How a home is rented also impacts deductions. Buyers should tailor their search to a specific area with the help of a professional for the most success. When you’re ready to start a home search, contact the experienced agents at The Malibu Life for help.

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