Informational Articles

Tax Consequences Of Vacation Vs. Investment Homes

By | January 6, 2011

Investment HomesJanuary is once again upon us, and with it come our seasonal residents!

Our 2011 season is forecast to be one of the busiest seasons on record.  Buyers have picked up on the fact that prices stabilized over a year ago and, now that interest rates are creeping up again, have jumped back in the driver’s seat.

A good portion of those residents aren’t ready to move here (not even part-time) but are looking forward a couple of years and want to pick something up when prices are low and they can get positive cash-flow out of their units.  There are many ways homes can generate income, but for today, we’ll focus on vacation homes versus investment homes.

Vacation Vs. Investment: Definitions

A vacation home (aka a 2nd home) is a house or condo more than 50 miles away from your primary residence that you use for personal purposes the greater of 14 days or 10% of the total days it is rented to others at a fair rental price.

An investment home is a house or condo used almost entirely for income purposes in the tax year.  Although some personal days are allowed, the primary purpose of the condo must be to generate income or tax benefit.

A day of personal use is a day:

  • You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home under a shared equity financing agreement
  • A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price
  • Anyone under an agreement that lets you use some other dwelling unit
  • Anyone at less than fair rental price

Tax Benefits For Investment Homes

When you own a bona fide investment property, you have the ability to deduct lots of big expenses relating to the maintenance of your home, including property taxes, mortgage interest, maintenance, utilities, insurance, casualties, and management expenses.  You also get to claim the depreciation on your home.  These deductions can be used to offset other types of income, creating a tax haven.

If you’re using the home as a vacation home then you can still deduct certain expenses (mortgage insurance, property taxes, and casualty losses) but you can’t claim in excess of your rental income.  You’ll also have to divide your total expenses between your days of personal and investment use.

There’s a lot of great, easy-to-read information about this – including some special rules – at the IRS website: http://www.irs.gov/taxtopics/tc415.html.

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