VACATION HOMES - SECOND HOMES

INCOME TAX REPORTING

1.  SECOND HOME - NOT USED AS A RENTAL

A.     The following expenses paid on a vacation/second home owned by a taxpayer are generally tax deductible and are includable on Schedule A, Itemized Deductions:

(1).  Real estate taxes paid.

(2).  Mortgage Interest  - Mortgage interest paid is deductible in most cases. 

(3).  Points on purchase or refinance - Must be amortized over life of the loan.

(4).  Casualty losses.

B.     The following expenses on a non-rental vacation/second home are not   deductible:

(1). Homeowners association dues, assessments, etc., insurance, utilities, repairs, mortgage insurance, or any other similar property expenses.

2.  VACATION HOME - USED PERSONALLY AND AS A RENTAL

A.     Primarily Personal Use – The property is rented 15 days or less a year.

(1).  Rental Income – Rental Income is not includable in income.

(2). Expenses – Mortgage interest and taxes exceeding rental income are includable on Schedule A.

B.     Mixed Use – The property is rented for 15 days or more a year AND used personally for the greater of (a) more than 14 days, or (b) more than 10% of total number of days rented, then rental deductions are limited.

(1).  Income - All income is reported.

(2). Expenses – Interest and real estate tax expenses are allocated based upon the percentage of rental use to total days in the year, with the non-rental portion reportable of Schedule A.  Other expenses directly attributable to income are allocated based upon the percentage of rental use to total use.  See RENTAL EXPENSE LIMITATIONS below.

(3).  Net rental loss - Rental losses CAN NOT exceed rental income.  Unused deductions can be carried forward to future years. 

C.     Rental - Rented for more than 14 days a year AND used personally for not more than the greater of 14 days or 10% of total rental days.

(1).  Income - All income is reported

(2).  Expenses - All expenses are allocated based upon the percentage of rental to total use.

(3).  Net rental loss - Expenses CAN exceed rental income, BUT, real estate rental losses are subject to the passive loss limitation rules.

RENTAL EXPENSE LIMITATION.  Other expenses directly attributable to mixed-use rentals cannot exceed the rental income from the property which equals the total rent receipts reduced by expenses for obtaining tenants such as advertising and Realtor’s fees, (“the Gross Rental Income”), less the prorated portion of mortgage interest and property taxes (see the formula in B. 2. above).  The prorated rental portion of other expenses are then deductible in a specific order:  First - Other rental operating expenses such as utilities, management fees, maintenance costs, insurance, mortgage insurance, etc.; Second - Depreciation and amortization that affect the cost basis of the property.  If the prorated portion of interest and taxes equals the gross rental income, then none of the other expenses are deductible, although they may be carried forward.

PERSONAL USE.  A personal use day is any part of a day the home was used by: (a) the taxpayer, or by any other person who owns an interest in the home, or the relatives of either; (b) by any individual who uses the home under a reciprocal agreement, whether or not a rental is charged, and; (c) by any other individual who uses the home unless a fair rent is charged.