|Home Away From Home |
Second-home market at a glance
|Sources: American Demographics, National Association of Realtors|
Vacation HomeThe majority of owners, or 51%, keeps their second properties as true vacation homes and has little or no interest in renting them, according to the realtors association. Owners can deduct the property taxes on a second home and any mortgage interest, up to a limit. The tax code allows homeowners to deduct mortgage interest on two homes, up to $1 million. But even a vacation owner, or any homeowner for that matter, can enjoy some tax-free rental income. Taxpayers who rent their homes, or vacation homes, for less than 15 days during the year don't have to report the rent as income (nor do they get to take any related tax deductions).
Vacation and Rental HomeA home can be treated for tax purposes as both a residence and as a rental unit with certain tax deductions. The owners must occupy the home for more than 14 days in general or more than 10% of the days the property is rented to others at fair value. Rental income can be offset with deductions prorated for the rental period for expenses such as mortgage interest, real estate taxes, insurance, utilities and maintenance, said Trinz. Homeowners can also claim depreciation, a deduction for the wear and tear of property, for the rental period. But the deductions can't exceed the rental income under most circumstances. "It's basically a common-sense rule," said Trinz. Assuming the taxpayers meet the usual qualifications, they can still deduct the share of the mortgage interest for the portion of the year used for personal use.
Rental PropertyA vacation home is treated mainly as a rental property if the owners don't use it more than 14 days or more than 10% of the days it is rented out. A different set of more generous tax rules apply. Generally, said Trinz, income and deductions are treated as passive in nature. If the deductions exceed the rental income, usually the loss can only offset other passive income such as investment interest and dividends, until the property is sold. But, if the owners actively participate in managing the vacation rental, then they can shelter non-passive income with up to $25,000 of rental-related losses. The $25,000 limit begins to phase out for married couples with an adjusted gross income above $100,000 and phases out completely when that income reaches $150,000. When the home is sold, however, the owners must repay tax on deductions taken for depreciation.