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Blog posted On December 26, 2018
As the year comes to an end, taxpayers are starting to review how the new tax law will impact their 2018 tax returns. The Tax Cuts and Jobs Act (TCJA) implemented early last year, was the most sweeping tax reform passed in decades and impacted everything from corporate taxes to the size of tax deduction. However, for those who own vacation homes or rental properties, the tax law will remain largely the same.
According to the Internal Revenue Service (IRS), a vacation home is either classified as a personal residence or a rental property.
Personal Residence |
Rental Property |
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You rent out the home for more than 14 days* during the year |
You rent out the home for more than 14 days* during the year |
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Personal use during the year exceeds the greater of: (1) 14 days* or (2) 10% of the days* you rent the home out at fair market rates. |
Personal use during the year does not exceed the greater of: (1) 14 days* or (2) 10% of the days* you rent the home out at fair market rates. |
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*Count only actual days of rental and personal occupancy. Disregard days of vacancy, and disregard days spent mainly on repair and maintenance activities. |
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For vacation homes classified as personal residences, you do not need to report any of the rental income on your Form 1040, but you can also not deduct any expenses related to the rental period like rental agency fees, cleaning, etc. If your vacation home is near a major event venue and you rent it for a short period of time at a higher rate during a concert or sporting event, you will pay zero federal income tax.
For vacation homes classified as rental properties, the laws differ. The mortgage interest tax deduction will not apply, as it is only limited to properties classified as personal residences. When your allocable rental expenses exceed your rental income, you have the opportunity to generate a deductible tax loss that you can report on Schedule E of your Form 1040.
MarketWatch contributor Bill Bischoff comments, “You may be able to stage-manage the number of rental and personal days between now and yearend. When your vacation home is firmly in the rental property category, adding more rental days will yield better financial results. You’ll have more income, and you can usually shelter it all with deductible expenses.”
To best determine what tax deductions you qualify for, file your return with a trusted tax professional. When you are in the market to buy a vacation home or rental property, review the potential costs and savings with a mortgage professional. The type of financing you choose will have a long-term impact on how much you will spend over time and how much you could potentially save.
Sources: MarketWatch, MarketWatch
