You may be spending the summer at your vacation home, or renting it out for part or the entirety of the season. No matter the case, how the IRS views your vacation residence depends on what it’s used for. And also how much you use it. We clear the air below.
‘Mostly’ translates to renting out the home for 14 days or fewer a year. When this is the case, it is considered your personal residence. And you do not have to report income renting it out. Because of the nature of use, you are therefore not able to deduct expenses associated with the home. However, you can still claim the typical homeowner deductions. They might relate to mortgage interest, real estate taxes, and casualty losses.
Following the logic above, if you rent out your home for 14 days or more per year, you are considered a landlord and must report income on Schedule E. You can also deduct expenses, but beware of limitations. For example, if the home is the residence, the deductions must not exceed the rental income.
The home qualifies as a residence if it provides sleeping space, bathroom facilities, and cooking facilities. That might include a house, apartment, condo, mobile home, motor home, or houseboat.
The home is also considered a residence if you use it for personal purposes for more than 14 days per year or 10% of the total days you rent the home.
Understanding the difference between personal and business use is also essential when filing taxes.
Personal use can mean when yourself and/or your family uses the home (even if they are renting it from you). It can also mean allowing guests use the home for free or at a discounted rate (less than fair market value).
If your personal use days are fewer than 14 or 10% of the time it is rented, it is considered a business. In this case, you’re able to deduct expenses up to $25,000 in losses each year, depending on your income. Often, owners of vacation homes do not use these residences for vacationing, and instead ‘maintain’ the property, as they don’t count towards personal use days.
Now that you have all of the information on your vacation home, it’s time to collect all of your records pertaining to your specific situation to prove its status in the event of an audit. If you’re unsure about how your vacation home’s use qualifies, consult your trusted tax professional.