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Make Your Vacation Homes Less Taxing For You!
If you buy a house in addition to your main home and stay there for some days in a year, you often rent it out for the rest of the year. It's called your vacation home. In that case IRS has different rules of taxation based on the number of days you stay there and number of days you rent it out. Here is your tax liability in each such option.
Vacation homes in this category are used for personal purposes for a lot of time and then rented out. If you have used personally your vacation home for more than 14 days in a year, making more than 10 per cent of the rental days, you fall in this category. Personal use may be made by yourself or by your family members or by somebody else who pays less than the market rental rates. These vacation homes are deemed as personal residences. This is good for you because IRS allows you to deduct interest up to $1 million on your mortgage debt of two personal residences. Property taxes are also deductible. If you are fortunate enough to own more than two homes, you can pick two of them with the most mortgage interest every year (one has to be your main residence!) You have to be careful about the expenses when you rent this house. You need to allocate interest and property taxes on this property between rental and your personal use. Suppose you have rented the house for two months, used the house for two months and the house remained vacant for the rest of the period during the year. The time the house was vacant is considered to be your personal use. So you can now allocate 20% of the interest and taxes to rental period the balance 80% towards your personal use. You can claim the personal part of these expenses in itemized deductions. The tax court has accepted this method. From the rental income, you can deduct 20% of these expenses. If there is any rental income still left, you can deduct a percentage of expenses incurred towards maintenance, insurance, utilities and depreciation so that you can make the remaining income to zero. If you have some more expenses not deductible this year, they can be carried forward to future years and then you can claim deductions in those years. This is not a very difficult thing, but you need to get a grip on the paperwork.
Suppose you have used your vacation home very little during the year and rented it out for a long period. In this case the tax rules for rental properties will be applicable to your vacation home. Suppose you have used the home personally for 20 days and rented it for 200 days, you are assumed to be the owner of a rental property and not a vacation home. If you had used the house for 21 days in this case, it would have been treated as your personal residence. Now the interest on mortgage, property taxes and all other expenses will be allocated proportionately. So you need to split the expenses in the proportion of 20/220. If the money you have received from renting the house fails to cover all these expenses, you can claim a taxable loss on schedules E. This can be called as passive loss. You can deduct this passive loss from passive income during that year. If you have adjusted gross income (AGI), below $100,000, then you can write off passive rental real estate losses up to $25,000. But if the average rental period is less than seven days, this exception is not applicable. There is another problem also. The interest for the period of personal use (20/200) is not deductible, as your home cannot be treated as personal Residence. So it is better to spend some more time in your vacation home during the year!
This is a bit rare situation it benefits you. If you have rented your vacation home for less than 15 days in the year and used for more than 14 days in the year, your home is considered as personal residence and you proceed to deduct the entire interest and property taxes as you do for your primary residence. In this situation, you need not declare any of your income from renting the property! There are all sorts of financial decisions you take in your life. You make gifts to your children; you make investments and acquire real estate. Do you really know the tax implications of these decisions, which can save you thousands of dollars? Stop donating your money to IRS is an e-book on these little known tax secrets. It is written by Chintamani Abhyankar, a tax professional for last 25 years. Get the expert advice. Article Source:
http://EzineArticles.com/?expert=Chintamani_Abhyankar
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