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Vacation properties are subject to different federal income tax rules depending on how much personal and rental use they have during the year. Now is a good time to plan how to use your vacation property for the rest of this year with tax savings in mind.
Your vacation home will be treated as a rental property for federal tax purposes, if you rent it out for more than 14 days and your personal use does not exceed the greater of:
For example, if you rent your property for 210 days and vacation there for 21 days, your property will be treated as a rental. But if you vacation there for 22 days, the property is considered a personal residence.
If your property qualifies as a rental, follow this 6 step procedure to report the income and expenses for federal income tax purposes.
From a federal tax perspective, you may benefit from taking some extra vacation days during the rest of the year. That could move your home from being classified as a rental property for tax purposes to being classified as a personal residence.
With a personal residence, you can usually deduct all the mortgage interest and property taxes (part as rental expenses and part as itemized deductions). And you can usually shelter any remaining rental income with allocable indirect operating expenses (such as utilities, maintenance and depreciation).
On the other hand, you may have plenty of passive income or AGI below $100,000 and no problem with the seven-day rule. In these scenarios, you can currently deduct your whole rental loss.
If the nondeductible mortgage interest allocable to personal use would be a relatively small amount, consider minimizing your personal use for the rest of the year in order to increase your fully deductible rental loss. You might also be able to rent the place out for more days, which would boost your cash flow.
The rules explained here apply only to vacation home rentals that have limited use by you (or your family and friends). For properties that are classified as personal residences, different federal income tax rules apply.
If you have any questions, contact us at firstname.lastname@example.org.