Wouldn’t it be nice to own a vacation house in your ideal location? You have a place to escape to when you want to take a break from the hustle and bustle of the big city. You can also save money from the costs of hotel accommodations while feeling at home. But most importantly, owning a vacation property or a rest house is a great way to invest. Your vacation property can be a good source of additional income when you open your doors to vacationers and tenants, and when you reap its money-saving tax deductions.
Yes, owning a vacation home has tax benefits. You can claim the most tax breaks possible, making your ownership of the property more cost-efficient. The tax treatment of your vacation property depends on the number of days you use it for personal purposes as well as the number of days you rent it out at a fair market price.
The following costs may be eligible for tax deductions:
1. Mortgage Interest
Mortgage interest, or the interest charged on a loan to purchase your vacation property, may be eligible for tax deductions. This is similar to the mortgage interest you pay toward your primary dwelling.
In the US, in order for a second home like a vacation property to have a tax-deductible mortgage interest, the property must be used to secure the loan. The vacation property should also contain basic living amenities like sleeping, cooking, and toilet facilities.
Apart from a dwelling, the deductions in interest can also be applied to other properties like boats and recreational vehicles secured with a mortgage as long as they have permanent living amenities as well.
2. Property tax
In addition to mortgage interest, the property taxes you pay on a second or vacation home are also tax-deductible. If mortgage interest tax deduction is quite limited to a single vacation property, the property tax, on the other hand, is deductible on any number of vacation properties. Such deductions will help reduce the burden of holding several properties as rental units or investments.
3. Rental Costs
Let’s say you don’t use your vacation property often and you decide to rent it out. You might be pleased to know that you may be able to deduct some of the expenses associated with renting the property. Some of the costs eligible for deductions include home improvement costs, interests, maintenance, insurance, management fees, and depreciation, which will help eliminate the amount of rental income to be taxed.
As we have mentioned, the tax deductions of your vacation property depend on how often you use it for personal purposes and the number of days you rent it out at a fair market value. Any day your vacation home is used by you, your parents, children, siblings, and other relatives, is counted as personal use.
- You use often, rent seldom
If you rent out your home for less than two weeks (14 days) during the year, any rental income you collect can be tax-free. Property taxes and mortgage interest can also be deducted whether or not the vacation property is used to generate income. However, rental-related costs cannot be deducted.
- You rent often, use seldom
If you rarely use your vacation home (not exceeding 14 days a tax year or 10 percent of the total number of days it is rented at a fair market value), your property qualifies as a rental property. With this, you can qualify for deductions in terms of rental-related costs. You just have to report the entire rental income you receive.
Just remember that if you only rent out the property but you don’t use it yourself, you might not be eligible for tax deductions.
With the proper tax planning and professional advice, it is possible for you to maximize your tax advantages and enjoy the advantage of having a vacation home.
Carmina Natividad is a savvy writer for Depreciator, an Australian-based business specializing in Tax Depreciation Schedules. Being an enthusiast of pursuing financial security herself, she writes and shares self-help articles focused on personal finance, tax planning, and property investing.
February 28, 2017