Hi, Dick-
My wife and I own a vacation home on Cape Cod. We enjoy having our family, especially the grandchildren, visit and spend time relaxing on the beaches of the National SeaShore.
We receive a number of inquiries from real estate brokers to rent our vacation property to tourists and vacationers.
How should we handle the financial obligations from our vacation home which now has become a lucrative business situation?
Sincerely,
“Retired and Sunburned”
Dear “Retired and Sunburned:”
When you use a home for both rental and personal use, regardless of that home’s location at the beach or in the city, you run into the tax code’s vacation home rules that make that home either a residence or a rental property.
It’s a residence when you
- rent it for more than 14 days during the year and
- use it for personal purposes for more than the greater of 14 days or 10 percent of the days that you rent the home out at fair market rates.
Example. You own a beachfront vacation condo. During the year, you rent it out for 180 days. You and members of your family stay there for 90 days. The property is vacant the rest of the year except for seven days at the beginning of winter and seven days at the beginning of summer, which you spend maintaining the property. Your condo falls into the tax code–defined personal residence because
- you rented it out for 180 days, which is more than 14 days, and
- you had 90 days of personal use, which is more than 14 days and more than 10 percent of the rental days.
Disregard the 14 days you spent maintaining the place.
The fundamental principle that applies when your vacation home is a personal residence is that expenses other than mortgage interest and property taxes allocable to the rental use cannot exceed the gross rental income from the property. In other words, rental operating expenses and depreciation cannot cause a tax loss on Schedule E of your Form 1040 for the year in question.
Sincerely,
Richard Soo Hoo CPA
508-954-6270
richardsoohoocpa@gmail.com
