Tax Tricks for Vacation Home Owners: Make Your Investment Work for You

by | Aug 8, 2023

Owning a vacation home can be an excellent investment, offering not only a retreat for personal enjoyment but also a lucrative income source when rented out. However, navigating the intricate tax laws connected to vacation home rentals can be daunting. Understanding these laws can help homeowners maximize their rental income while ensuring compliance with the Internal Revenue Service (IRS) regulations.

Firstly, it's crucial to know that if you receive rental income from a dwelling unit such as a house or an apartment, you are permitted to deduct certain expenses. These may include mortgage interest, real estate taxes, maintenance, utilities, insurance, and depreciation. These deductions reduce the amount of rental income that's subject to tax. However, tax laws categorize your property differently based on your personal use of the property and the length of time it's rented out.

One of the pivotal tax rules is the 14-day or 10% rule. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of 14 days or 10% of the total days you rent it to others at a fair rental price. If you rent the property for less than 15 days within the year, you do not need to report any of the rental income, nor do you deduct any expenses as rental expenses.

However, if you rent a property for more than 14 days, the income is taxable. Yet, the IRS allows homeowners to deduct rental expenses, including fees paid to property managers, insurance premiums, maintenance expenses, mortgage interest, property taxes, utilities, and depreciation. The amount you can deduct is based on the percentage of days the property was rented out compared to the total number of days it was used.

For instance, if your vacation home was used for a total of 120 days in a year, and it was rented out for 100 of those days, you can deduct 83% of the rental expenses against the rental income. The remaining 17% of rental expenses cannot be deducted.

Moreover, if the property is used for personal purposes for more than 14 days or 10% of the total rental days, whichever is greater, the IRS considers it a personal residence, and rental loss cannot be deducted. However, rental expenses up to the level of rental income, as well as property taxes and mortgage interest, can still be deducted.

Owners may also be able to deduct up to $25,000 each year in losses, depending on their adjusted gross income. Passive losses can be written off if owners manage the property themselves. These are losses that can be deducted if the taxpayer does not materially participate in the rental property.

Additionally, there are more potential tax deductions for vacation rental property owners, including property taxes, repairs and maintenance, property improvement, mortgage interest, guest-service fees, insurance premiums, cleaning and maintenance costs, advertising costs, legal fees, and depreciation. It's important to maintain meticulous records of all rental expenses throughout the year to maximize these deductions.

Remember, tax laws are complex, and they can change frequently. Therefore, it's recommended that vacation homeowners consult with a qualified tax specialist to fully understand the implications and make the most of their investment. 

In conclusion, renting out your vacation home can provide substantial tax benefits, making your investment more rewarding. By understanding the tax rules and planning ahead, you can ensure that vacation home ownership is financially advantageous. If you would like more information about rental property deductions please contact Freese, Peralez, & Associates we'd love to help you maximize your investment.