Due to U.S. tax laws and tax benefits, owning a vacation home is actually more affordable than you might think.
No matter your goals for a second home, understanding the tax breaks for your vacation residence can help you relax in style.
What is a Vacation Home?
First, you’re going to have to unlearn your definition of a vacation home. According to the IRS, a vacation home can be any residence that has sleeping space, cooking space, and is “permanent in place.” In this case, permanent doesn’t mean immobile. Therefore, boats and RVs can be designated as vacation homes.
Also, a vacation home does not have to be located in a typical vacation destination. Sure, vacation homes can be found up in the mountains or out on the sandy beaches, but they can also be found in the middle of nowhere, surrounded by farmland, or a small condo in the middle of a noisy city.
Whether a multi-million dollar property or bare-bones living, all vacation homes share the same tax benefits. The only variable is how you intend to use your property.
Just for You: Personal Use
The first option for your vacation home, as far as filing your taxes are concerned, is owning a second home for personal use only. If you and your family are the only inhabitants, then here’s what you need to know.
You can deduct the same expenses as with your primary residence: property taxes and mortgage interest. You could even deduct home office expenses if you meet the criteria.
And here’s some great news, the IRS will even let you rent your vacation home and keep the income tax-free. Of course, there are rules – to maintain personal-use status of your vacation home (and keep your rental income tax-free), you must rent your home for 14 days or less.
If you rent your home for more than 14 days out of the year, then the tax rules change.
The second option is to designate your vacation home as rental only. This is a good way to help pay off your retirement residence.
If you rent your vacation home for more than 14 days out of the year, then you must report your rental income on your tax return. However, you get tax breaks in the form of maintenance deductions and costs related to rental expenses. This means you can deduct towels, furniture, and toilet paper costs – because it’s a rental.
When your vacation home is a designated rental property, you can also deduct insurance costs, repairs, and housekeeping costs. To maximize your deductions, make sure that you treat your vacation home like a business, and make sure to involve yourself in the process.
Split the Difference: Combo Use
When you split the time between using your vacation home for yourself and renting it out to others, you have to separate the income earned and expenses accordingly, but that’s the great thing about TurboTax. Just answer a few simple questions about your vacation home and TurboTax will help you easily file your taxes and find you the tax benefits and tax deductions to save you money on your taxes.