Those lucky enough to score a prime vacation rental on the Texas coast often consider the possibility of ownership.
If you’re thinking of buying a vacation property, here are tax tips to consider:
- The Internal Revenue Service considers a vacation home or a second home one that is permanently in place ) and offers sleeping, cooking and toilet facilities. This would include not only a shore or lake home but a condo, co-op, mobile home, RV, house trailer or a yacht.
- For tax purposes, you can deduct “qualified residence interest” on a mortgage secured by a second home – that’s in addition to interest that you pay on a mortgage that is your primary residence. It also applies to additional loans on a primary home or second home including a second mortgage, a line of credit, or a home equity loan.
- In addition to mortgage interest, local and state real estate taxes paid on a second or vacation home are also generally deductible.
- You can also deduct personal property taxes payable on the value of personal property at your second or vacation home, including those taxes due on your yacht or other boats (that deduction is available if you itemize regardless of your living arrangements).
- If the property is your own property and you never rent it out, you can claim those breaks but not the cost of upkeep of the property.
- If you rent out your property, you may be able to deduct some home improvement costs. To qualify, you must not personally use the home for at least 14 days or 10% of the number of days you rent it out at a fair rental price.
- If your deductible rental expenses are more than your gross rental income, you will report a loss. Your rental losses, however, generally will be limited by the “at-risk” rules and/or the passive activity loss rules.
- What if you’re somewhere in between hanging at your home for relaxation and renting it occasionally? So long as you rent the property fewer than 15 days during the tax year, you are still allowed to take the deductions for the interest, taxes, and casualty and theft losses.
- If you use your vacation home for personal use and you rent it out for more than 15 days, you’ll pro-rate the income and the expenses according to the amount of time you (or your family) are at the property.
- What about using your second home as a workspace (and I mean more than checking your smartphone from the comfort of your hammock)? If you rent part of your home to your employer and provide services for your employer in the rented space, you would report the rental income on your Schedule E.
- When you sell your vacation home, you will likely be subject to capital gains tax.
- What if the market turns sour on you? You may, however, claim a capital loss on investment property (assuming your vacation home as a rental qualifies) depending on the nature of the loss and whether you have offsetting gains.
Check with your tax professional before making a move.