If you own a vacation home (some boats and recreational vehicles also qualify) that you also rent out to others, keep track of who uses it during the year to maximize your tax breaks.
* Meet the rules and
receive tax-free income. If your home is rented for 14 or fewer days during the
year, you don't have to report the income. You can generally deduct mortgage
interest and real estate taxes as itemized deductions, but you can't deduct any
other rental expenses.
* Limit your personal use,
and deduct all your rental expenses. If you limit your personal use to not more
than 14 days or 10% of the time the home is rented, all rental expenses are
deductible.
* Offset your rental
income with your rental expenses. If you use the property for more than 14 days
or 10% of the number of days it's rented, the rules change. Your rental
deductions (except for taxes and mortgage interest) are limited to the amount
of your rental income.
Example: You stayed in your vacation home 20 days last year. It was
rented at fair market value for 190 days. In this example, your personal use
exceeded the 10% limit (19 days). Your rental deductions are limited to the
rental income you received.
* Convert the property to
your residence, and the gain when you sell may be tax-free. If you use your
vacation home as your principal residence for two out of the five years before
you sell it, you may exclude up to $250,000 of gain ($500,000 for married
couples) from your income. However, you will have to pay tax on gain to the
extent of certain depreciation previously taken after May 6, 1997.
The rules are complex, but a basic understanding of
the rules and good recordkeeping will help you get the best tax breaks from
your vacation home. Give us a call at (518) 798-3330 if you would like more information.
