Tax Implications for Vacation Homes/Investment Properties

It’s always helpful to review how the IRS treats vacation homes as opposed to investment properties. Any individual who owns a vacation home and does not strictly utilize it for personal use should be aware of these tax implications.

If you rent your property fewer than 14 days per year, it qualifies as a vacation home. Income is not reported and real estate taxes and interest are deductible on Schedule A. Operating expenses are not deductible.

If renting is the primary use and personal use is less than 14 days, it is an investment property and income must be reported, but all operating expenses and depreciation are deductible. If expenses exceed income, you can create a rental loss that may reduce your income taxes. In order to deduct the rental loss, owners must keep personal use under 14 days. If you exceed 14 days, your rental loss is not tax deductible.

Also, a day spent working on your property is not counted as a personal use day as long as there is a reasonable balance between the time spent working and personal time. You can’t change a light bulb and spend the rest of the day at the beach and call the day maintenance. You have to spend a reasonable amount of time on the property. Remember to keep records of what you did and when.

Rules defining personal use are not always obvious:

  1. Days rented or used by relatives, even if paid rental, are personal use.
  2. Days donated to charity are not only personal use, but are not deductible as charitable contributions.
  3. Days traded or exchanged count as personal use.
  4. Rentals at less than fair market are personal.

Proper tax reporting in this area is not always clear, but it is critical to figure out whether or not your home qualifies as a vacation home or an investment property. To further discuss these tax implications, please contact BSSF by calling 717.761.7171 (Camp Hill office), or 717.581.1040 (Lancaster office).