When Not To Call The Vacation Home Residential Property

If you own a vacation home, it is usually desirable to have it treated as rental property for tax purposes. It is considered rental property if you personally use the house for 14 days or less in a year, or, even if you use it for more than 14 days if your personal use is no more than 10% of the total days it is rented at fair market value. Alternatively, the property would be considered residential property. The advantage of having the property treated as rental property is that you would be able to deduct the total business related expenses and depreciation and take up to $25,000 in losses per year subject to the passive loss rules. Under the passive loss rules, once your adjusted gross income exceeds $100,000 the maximum $25,000 loss deduction starts being phased out, and disappears entirely when adjusted gross income exceeds $150,000. However, the passive losses can be carried forward to future years in which the loss limitation is not triggered. You should also be aware that to the extent you make personal use of the rental property, the portion of the mortgage interest attributable to your use of the property becomes personal interest that is not deductible for tax purposes. For taxpayers who are unable to take deductions on the vacation home because of the passive loss limitation, it may be desirable, tax wise, to make additional use of the vacation home so that it is treated as residential property, since it will enable them to treat the mortgage interest as a tax deductible interest expense. These are just a few thoughts about tax consequences of vacation home ownership and strategies for maximizing the benefit. Since the rules are quite complex, many vacation homeowners meet with us each year to help them with the tax planning.

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