by David M Kendrick, CPA, MST

Summer has finally arrived in the Great Pacific Northwest!  With warmer weather, some of us may be contemplating the purchase of a vacation home, timeshare, boat or an RV.  With ownership of one of these “second homes” comes certain tax benefits that may help defray the cost.  Of course, there are certain conditions and rules that must be followed in order to claim these tax benefits.

In general, you may write off qualified mortgage interest on a qualified residence of up to a total of $1.1 million of debt related to the acquisition or home improvement on your first and second home.  In addition, you may deduct the property taxes paid without limitation.  Both of these expenses are available as itemized deductions.

However, we often rent out our vacation homes, timeshares, boats and RVs when we are not occupying them ourselves. Generally, this qualifies as “rental use”.  In addition to deducting both mortgage interest and property taxes; other expenses may also be deductible including, but not limited to, management fees, repairs and maintenance as well as depreciation.  However, there are certain limitations when there is both personal and business use:

Personal use property:

If you have more than 14 days of personal use or your personal use is greater than 10% of the number of days the property was rented at fair market value, it automatically is considered personal use property and no rental losses are allowed (the interest and property taxes may still be eligible as an itemized deduction).  Keep in mind you can always deduct rental expenses up to the amount of rental income; if it is personal use property, you are not eligible to deduct expenses in excess of rental income (losses).

Rental property:

If your personal use is less than 14 days, or less than 10% of the number of days rented, the property is considered “rental property”.   In this case, losses, (generally limited to up to $25,000 if married filing jointly)  under the Passive Loss rules, may be deducted.   Oddly enough, if you rent the home for 14 or fewer days, there is no need to report the rental income!  However, exceed this limit and all rental income becomes subject to tax.

Boats, RVs:

The qualified mortgage interest deduction is available for RVs, boats and house trailers however, they must have sleeping, cooking and toilet facilities to qualify as a “second” home.

This is just a brief summary of the many tax advantages of owning a second home; there are other important considerations to take into account including the future sale of the home, converting to rental or business use, reconverting from business to personal use property, mixed use.  There is also gifting and estate tax planning which should be carefully considered as part of your purchasing decision.  We can help you explore all of the tax benefits and consequences of home ownership and the non tax factors as well.   Please contact our office if you would like a consultation.