Owning property can be a complicated and tricky business. On one hand you have your personal residence, with all the tax rules that apply to homeowners. And when you have a rental property, that’s considered income, a business, and has all the tax laws concerning income-generating activities. But what about the third type of personal property, the vacation home?

More than 3 million Americans own vacation homes, and many more rent them on either a short-term or long-term basis. For people who own their property, there are special tax rules. These rules also vary depending on whether the vacation home owner rents the home for part of the year and home many days a year the homeowner stays there. Therefore careful record-keeping is important.

How the IRS Treats a Vacation Property

First, let’s look at what qualifies as a vacation home. The IRS considers a second home or a vacation home to be a dwelling that is permanently in place. Even if it can be moved, like a boat or RV, if it offers sleeping, cooking and toilet facilities, it’s most likely considered a second home. A hunting cabin would likely qualify, but bare land would not.

If you hold a mortgage on your second home, you can deduct “qualified residence interest” even if you have a mortgage on your primary residence. In addition to mortgage interest, local and state real estate taxes on vacation properties are typically deductible as well.

But What if You Rent Out Your Vacation Home?

If you never rent your home, you can deduct the expenses listed above, but not the cost of maintenance. But if you do rent the property occasionally, you may be able to deduct some of these costs.

To qualify, you must not use the home for more than 14 days a year OR 10% of the number of days you rent it. (And the IRS assumes you rent it at fair rental price. Letting your brother borrow it for the cost of cleaning doesn’t count.) If you meet these criteria, then instead of deducting the mortgage interest on a Schedule A, you instead tally all the expenses (mortgage interest, maintenance, utilities, taxes, insurance, and so on) together with the rental income. This total will be the rental income that is taxed.

This is just a short overview to give you a sense of what issues are at play with a vacation property. You should always check with an accountant for specific concerns.

Real Property Management can help you manage your vacation property as well. Whether you’re planning to rent or not, you could use someone to keep an eye on the place when you can’t be around. Call our office for more information.

Tax Tips For a Vacation Home