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REAP TAX
BENEFITS OF VACATION ABODES
With summer approaching, prime vacation season is about
to begin. Hopefully, you’re packing your bags with books
and suntan lotion for an out-of-town trip. Perhaps you’re
even going to spend a few days at your other home.
In addition to its relaxing atmosphere, a vacation abode may
provide another creature comfort -- tax savings. Most people
understand the financial advantages of home ownership, but few
may realize how to benefit from their vacation home. Let’s
take a look at these tax rules and what you can do to ensure
your vacation home gives you a break from taxes.
Rental vs. Residence
Keep in mind, the IRS broadly defines vacation homes as dwellings
that possess:
• Sleeping areas;
• Cooking accommodations;
and,
• Toilet facilities.
So this includes recreational vehicles, boats and even time-share
units.
Owning a vacation home can help you save on more than hotel
and food costs. But you must understand how the IRS classifies
these abodes. It does so in three ways:
1. As residences.
The IRS considers some vacation homes personal residences. However,
some rental units are considered residences, even if rented
for more than 14 days annually, or used for personal reasons
for at least 15 days or 10% of the number of rental days, whichever
is greater. Review the rules to help you understand what constitutes
rental and personal use. Personal use includes use by you (the
owner) and family members, such as your siblings, spouse and
children -- unless you charge these family members a fair rental
fee. Because it’s treated as a personal residence, you
may be able to deduct real estate taxes and the qualified mortgage
interest, attributable to a maximum of $1.1 million in debt
(generally consisting of $1 million in acquisition debt and
$100,000 in home equity debt), with restrictions. Under the
vacation home rules, certain deductions may be limited in total
to your gross income from the property for the year.
2. As rental properties.
This category extends to vacation properties rented for 15 days
or more, but in which personal use is limited to less than 14
days or 10% of rental days during the year. Keep in mind that
rentals can cause losses, but the rules may reduce your loss
because you must still allocate deductions between personal
and business use.
3. As short rental properties.
You can receive a tax break for a short rental property if you
use it personally for more than 14 days each year and rent it
for less than 15 days annually. And you won’t have to
claim rental income because the IRS treats your vacation home
as a "pure" personal residence. Hence, you can deduct
all your qualified residence interest and property taxes. But
you forgo deductions on operating expenses for the rental period.
Additionally, if both your primary residence and vacation home
appreciated in value, you can use the capital gain exclusion
twice in two years. Say you’re an empty nester wanting
to move to your vacation home. You’ll likely benefit from
a lower property tax rate as well as a $250,000 capital gain
exclusion ($500,000 for you and your spouse) on the sale of
your primary residence. If you occupy your vacation home as
your principal residence for two years or more, you can exclude
up to another $250,000 ($500,000 for married couples) in gain
on its sale. But you may be required to recapture any depreciation
you’ve taken on the property.
Allow Time for Taxes and Recreation
As with many tax areas, the rules can be confusing. We can help
you clear up the murky waters of vacation home ownership and
ready your tax situation for smooth sailing. Please call us
today.
If both your primary residence and vacation home appreciated
in value, you can use the capital gain exclusion twice in two
years.
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