CPA GROUP OFFERS ADVICE
How Vacation Home Ownership Affects Your Taxes
If low interest rates, stable home
prices, and glimmers of an eco
nomic recovery have you think
ing about buying a vacation home
this fall, the N.C. Association of
Certified Public Accountants has
some advice lor you.
The affordability of your beach
cottage or condominium may be af
fected by how frequently you use it
and how often you rent it.
Restricting Your Home
To Personal Use
Before purchasing a vacation
home, the most fundamental ques
tion to consider is whether the
house will be used primarily for
rental purposes or personal plea
sure. If you never rent your new
home, the tax rules are quite clear.
You may deduct mortgage interest
and property taxes, just as you do
on your primary residence. In addi
tion, you may rent your home for
up to 14 days a year and collect tax
free rental income.
Be aware that lor non-rental
properties, homeowners may de
duct mortgage interest on their pri
mury residence and one other
home. So it you are thinking about
buying a third home for personal
use. be sure to consider the lost
mortgage interest deduction in esti
mating the cost of the purchase.
Mixing Business
And Pleasure
If you're like most people, you
may want to use your vacation
home pari of the time and rent it out
at other times to generate income.
Using your second home for both
pleasure and business subjects it to
different tax treatment. Generally,
the more frequently you use your
vacation home, the fewer the lax
benefits.
For a second home to be treated
as rental property, you may nol use
it for personal purposes for more
than 14 days during the year or tor
more than 10 percent of the total
number of days it is rented during
the year at fair market value,
whichever is greater.
It your home is considered rental
property, your deductions are re
stricted by the passive loss rules,
The biggest tax break
you get from rental
property is the ability to
deduct a portion of your
purchase price each
year : This gradual write
off ? called
deprecia tion ?
compensates you for the
general wear and tear of
your property.
not by the vacation home rules. The
income and deductions the home
generates are considered passive in
nature. I! deductions allocable to
the rental portion exceed rental in
come, the loss can only be used to
offset other passive income. In ad
dition, since the home is not con
sidered qualified residence under
the interest deduction rules, the
mortgage interest allocable to your
personal use of the home is consid
ered personal interest and is non
deductible.
It" your personal use exceeds the
greater of 14 days or 10 percent of
the number of days during the year
for which the home is rented at fair
market value, you include the rent
as income and claim offsetting de
ductions for the rent-related portion
of expenses, such as utilities, up
keep, interest, real estate tax, insur
ance and depreciation.
The deduction cannot exceed
rental income less (1) deductions
related to the rental activity itself,
such as advertising; and (2) interest
and real estate taxes allocated to
rental use. Any excess expenses
may be carried forward to future
years. Since the home is considered
a qualified residence for purposes
of the interest deduction, you can
deduct the personal use portion of
your mortgage interest as an item
ized deduction.
Personal Use
The Internal Revenue Service
definition of personal use is more
inclusive than you may think. If
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? OCEAN ISLE rf
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OAK ISLAND]
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Bolivia 253-6596
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Calabash ucb24 579-6238
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Holden Beach Causeway
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you let anyone ? relatives, friends,
or business associates ? use your
vacation home without charging
them fair rental value, the time they
spend there will be viewed as per
sonal use, thereby limiting your de
ductions.
t'y>e IRS strictly enforces these
rules. Kor example, suppose you
donate a week at your vacation
home as a charitable cause and the
charity auctions the week off at fair
market value. Because you do not
personally receive the rental in
come, you are treated as personally
using the home for that week.
The IRS does recognize that you
will need to spend some time main
taining and repairing your vacation
home. For this reason, days spent
doing repairs, painting or even
cleaning the home for the next
renter are not treated as your per
sonal days.
Qualified Deductions
The biggest tax break you get
from rental property is the ability to
deduct a portion of your purchase
price each year. This gradual write
off ? called depreciation ? compen
sates you for the general wear and
tear of your property.
You may also take a tax deduc
tion for repair costs, utility bills, in
surance, cleaning services, and
even fees incurred to advertise and
rent your property.
Be aware, however, that some re
strictions apply. The losses you pile
up when renting property are con
sidered passive losses and are
therefore subject to passive loss
rules. Generally, if you are actively
involved in managing your rental
property, you may deduct up to
$25,000 in passive losses against
nonpassive income (such as wage
income).
Your ability to deduct passive
losses is also affected by a gross in
come limitation. The $25,000 al
lowance is reduced by 50 percent
of the amount by which your ad
justed gross income (AGI) exceeds
$100,000 and completely disap
pears once your AGI hits $150,000.
Finally, don't let the complexity
of the tax law dissuade you from
purchasing a vacation home. CPAs
say your personal financial situa
tion will help determine whether it
makes smart tax sense to use a va
cation home for personal and busi
ness purposes.
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