Tax Breaks for Vacation Homes

With summer around the corner and the real estate market ripe for the picking (because real estate prices and mortgage interest rates are both down), the number of owners of vacation property could grow. The National Association of Realtors reports that vacation homes account for one-third of all new- and existing-home sales. If you own or are considering the purchase of a vacation home, factor in tax breaks that could lower your ownership costs and make this investment an attractive one for you.

Vacation homes

Most people think of vacation homes as ski chalets or beachfront property. The tax law doesn’t restrict many of the breaks for vacation homes to these types of properties. Vacation homes can include a boat or an RV, as long as the property includes sleeping, cooking, and toilet facilities.

Even time shares may qualify for certain tax breaks that go with home ownership.

Current deductions

You can deduct certain costs related to ownership of vacation property if you itemize deductions:

• Real estate taxes. Any property taxes paid on a vacation home are deductible; there is no limit.
• Mortgage interest. You can designate a second home to qualify for deductible mortgage interest. The same limits for a primary residence apply to a vacation home ($1 million for acquisition debt, plus $100,000 for home equity debt). Caution:
  If you pay any points to obtain the mortgage, the points are deductible ratably over the term of the loan (they can’t be deducted in the year of the home’s purchase like they can with a main home).

Renting out your vacation home

Since you don’t use your vacation home every day, it’s not uncommon to rent it out for days or weeks at a time. The amount of time you use your home and the days it’s rented to others at a fair rent determine your tax breaks:

• If the rental is no more than 14 days-you don’t have to report the rental income. However, you can’t deduct any maintenance or other costs beyond those allowed for real estate taxes and mortgage interest.
• If the rental is more than 14 days and your personal use is more than 14 days or 10% of the rental days-you can
  
  Tags: Credits/Deductions, Filing, Home & Real Estate, Tax Returns