V is for Vacation Home.
Spring Break is coming up in a few weeks and we’re lucky enough to be able to spend time with my parents in coastal North Carolina where I grew up. Every year that we go down there, I convince myself that I want a vacation home. And I know exactly what I want: a historic home in downtown Wilmington with a wrap around porch and enough outdoor space in the back to plant azaleas and roses and a dwarf magnolia. This is, of course, at odds with my husband’s plan to build a yurt in the Poconos.
Interestingly, no matter what you envision as a vacation or second home, the IRS is likely to agree. The IRS doesn’t rely on the notion of a cookie cutter vacation home when it comes to tax: it says that a second home can be a condo, co-op, mobile home, RV, house trailer – and even a boat if it has sleeping, cooking and toilet facilities.
Assuming that your vision of a vacation home and the IRS’ vision are similar enough, you can get a tax break or two on purchasing and owning a vacation home. For tax purposes, you can deduct “qualified residence interest” on a mortgage secured by a second home – that may also include points. But it has to meet the qualifications for a second home (generally, sleeping, cooking and toilet facilities) for purposes of the mortgage interest deduction: bare land does not count even if you occasionally plop a tent on it.
In addition to mortgage interest, real estate taxes paid on a vacation home are also generally deductible.
You might also be able to deduct some of the costs related to upkeep of the property if you rent out the property. Of course, that necessarily means that you have to report rental income, as well, but the income and tax breaks together might (I said might) help pay for the property.
There are restrictions on tax breaks when you use a vacation home as a residence and as a rental. If you have a vacation home that you own 100% for personal use, you don’t actually have to stay in it during the year to deduct the interest and real estate taxes. Additionally, if you own property that you use as a vacation home and you rent it fewer than 15 days during the tax year, you do not have to include the rent you receive in your income and you may not deduct rental expenses. You are still allowed to take the deductions for the interest, taxes, and (if applicable) casualty and theft losses.
If, however, you regularly rent your vacation home out, meaning that you rent is out and you do not personally use your vacation home for at least 14 days or 10% of the number of days you rent it out at a fair rental price (letting Aunt Margaret stay there on the cheap doesn’t count), you cannot take the deduction for home mortgage interest on a Schedule A. Instead, you would report the income received and claim a pro-rated share of expenses for the property on a Schedule E. There are some restrictions and tricky rules with rentals – so be sure and check with your tax professional for more details.
Finally, keep in mind that, at sale of your vacation home, you will likely be subject to capital gains tax. There’s an exception if you convert your vacation home to your primary home in sufficient time before the sale. Whether you’d want to do that to save on capital gains is an open question, depending on your current residence and the tax consequences that would flow from such a move. Again, check with your tax professional for the skinny before making that decision.
For more in the series, see:
Taxes from A to Z: A is for Alimony
Taxes from A to Z: B is for Barter
Taxes from A to Z: C is for Capital Losses
Taxes from A to Z: D is for Deductible Taxes
Taxes from A to Z: E is for Educator’s Expenses
Taxes from A to Z: F is for FSA
Taxes from A to Z: G is for Gift Expenses
Taxes from A to Z: H is for Home Improvements
Taxes from A to Z: I is for Injured Spouse
Taxes from A to Z: J is for Job Search Expenses
Taxes from A to Z: K is for Kiddie Tax
Taxes from A to Z: L is for Levy
Taxes from A to Z: M is for Making Work Pay Credit
Taxes from A to Z: N is for Noncitizen Spouses
Taxes from A to Z: O is for Offer in Compromise
Taxes from A to Z: P is for Penalty on Estimated Tax
Taxes from A to Z: Q is for Qualified Dividends
Taxes from A to Z: R is for Refund
Taxes from A to Z: S is for Standard Deduction
Taxes from A to Z: T is for Tuition and Fees Deduction
Taxes from A to Z: U is for Unreasonable Compensation
- Ask the taxgirl: What Qualifies as a Second Home?
- Taxes from A to Z: H Is For Home Improvements
- Taxes from A to Z: D Is For Deductible Taxes
- Taxes from A to Z: S Is For Standard Deduction
- Taxes From A To Z (2013): J Is For Junk Fees