Tax time for vacation homes

There are over 6.6 million vacation homes in America, and the Lake of the Ozarks provides one of the best, lowest taxed, lowest closing costs, and most affordable opportunities to get into this growing market.  This year I have sold second homes to buyers from California, Long Island, Arizona, Texas, Illinois, Florida, and many other states as well.  Some have bought for personal use, others as rentals, and some for future retirement homes.   All probably hope to sell someday for a profit, and with the forecasted demand for second homes and guidance from a competent buyer’s broker, they most likely will.

The tax rules on vacation homes can be tricky when it comes to renting them out and selling them.  It complicates matters even more when you rent them and use them yourself as a vacation home part of the time.  Let’s take a look at tax consequences so you can make a plan before you buy.

If you own a vacation home and you don’t rent it out, the rules are simple, and like your primary residence, you get to deduct the interest you paid on the mortgage and the real estate taxes on the property.  You can even rent the property 14 days or less and you don’t even have to report that income to the IRS.  Simple enough.

Where it gets more complicated is when you rent the property out for more than 14 days.   You get to deduct the mortgage interest, the real estate taxes, AND items such as advertising, cleaning and maintenance, utilities,     insurance, taxes, points, commissions for sales and rentals, tax return preparation fees, travel expenses, rental payments, repairs, and local transportation expenses.  You also get to deduct depreciation (also called cost recovery) and this is a big one, because it is based on the purchased price, even if you put little or no money down, and it is a paper expense, meaning it wasn’t paid out of pocket money like the items in the last sentence.  You also get to depreciate the major appliances on an accelerated schedule, 5 or 7 years versus 27.5 for residential real estate and 39 years for commercial. 

The real tricky part is when you rent a property and use it as your vacation home.  If you do, the IRS requires you to split the interest paid on mortgage deduction and the property taxes between Schedule E (the form for rental income and expense) and Schedule A (the itemized deductions form)   and you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. However, you will not be able to deduct your rental expense in excess of your gross rental income.  You need to keep your personal use days fewer than 15 days, or the rule says less than 10% of the time it has been rented out.  In other words, in order to get more than 15 days, you’d have to have in excess of 150 (actually 160) days of rental business and that is very difficult to do given the season at the Lake of the Ozarks. 

TIP: Days you spend working on, repairing, or remodeling the property are not considered a personal use day.  Keep good documentation and receipts and you can avoid running up the number of days of personal use on your property.  This will avoid you have to split your expenses between personal use and rental time, allowing you to maximize your deductions. Aim for 15 days or less of personal use, and you get the full tax deductions.

 If you have any questions buying or selling vacation homes or Lake of the Ozarks real estate, you can always contact John Garrett at 573-302-2320 or e-mail me for a fast response. 

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