With tax season upon us, individuals who own vacation condos must be certain they are able to claim every tax credit and/or deduction allowed them by law. The following is an excerpt from my book, Condo Living: A Guide to Buying, Owning & Selling a Condominium and is part of a tax credit series for the condominium owner and investor.
“There are specific limitations on the allowable business deductions available to a taxpayer who uses a vacation home for both personal and rental purposes. These limitations apply to individuals, S-corporations, partnerships, trusts and estates. The number of days that a vacation home is used for personal purposes, as compared to the number of days that the property is rented at fair value, determines the availability of tax deductions. As of the date of publication of this book, these rules may be summarized as follows:
Rule No 1: If the vacation condominium is used by the taxpayer for personal purposes for not more that fourteen (14) days during the taxable year, or for ten percent (10%) of days that it is rented at a fair price (if this is greater), then it is not considered the taxpayer’s â€˜home.’ In this case, tax deductions attributable to income derived from the rental of the property are not limited to gross income produced by the property.
Rule No 2: If the personal use of the vacation condominium exceeds the greater of : (a) fourteen (14) days; or (b) ten percent (10%) of the number of days during the taxable year that it is rented at a fair price, then it is considered the taxpayer’s â€˜home.’ In such cases, the tax deductions attributable to income derived from the rental of the property can not exceed the gross income generated by the property.
Rule No. 3: If the vacation condominium is the taxpayer’s â€˜home,’ and is rented fro fewer than fifteen (15) days during the tax year, any income derived from the rental during the tax year is not taxable, but the deductions attributable to income derived from the rental of the property are not allowed (the usual personal deductions for mortgage, interest and real estate taxes, however, may be taken).
Rule No. 4: If the vacation condominium is not the taxpayer’s â€˜home,’ as described under the vacation home rules, but the rental use is not an activity from which the taxpayer expects to make a profit, the taxpayer’s deductible rental expenses may not exceed his rental income, in the same manner as they are limited for a â€˜home’ under the vacation home rules. However, if the rental results in a profit during three (3) or more years during a period of five consecutive tax years, it is presumed by the IRS to be an activity engaged in â€˜for profit.’
In all cases, except the situation described in Rule No. 3, the personal use of the vacation property, on even a single day, requires that investment expenses be allocated between personal and rental days. The allocation between personal and rental expense is calculated, usually, in the following ratio:
Days rented at a fair rental price
Days of total use
According to the IRS, â€˜Days of total use’ equals the number of days the property was rented at a fair rental price plus the number of days of personal use. â€˜Days rented at a fair rental price’ is the number of days the property was rented at a fair rental price, excluding any day that the taxpayer also personally used the home. Days that the vacation home is vacant (even if the home is being advertised for rent at a fair rental value) and days spent maintaining the home are not included as days of â€˜personal use.’ What constitutes â€˜personal use’? The taxpayer is deemed to have used his vacation home for â€˜personal use’ for the entire day, even if it is used for only a part of that day, in any of the following instances:
- If the taxpayer, a member of his family or any person who has an interest in the home uses it for any part of the day, it is a â€˜personal use’ day. Family includes the spouse, brothers, sisters, lineal descendants and ancestors of the taxpayer. However, if the family member rents the vacation property for a fair price for use as his principal residence on that day, this use is not considered “personal use” by the taxpayer. However, if the taxpayer stays at the home while renting it to a family member who is using it as a principal residence, the days that the taxpayer spends at the vacation home count as days of â€˜personal use’ by the taxpayer, regardless of the rental agreement.
- If the vacation home is used by an individual under an arrangement that enables the taxpayer to use some other unit (whether or not fair rental is charged for the use of the other house), the taxpayer is considered to have used the vacation home for â€˜personal use.’ Thus, a house-swapping arrangement, under which two homeowners rent each other’s home as a personal residence, is “personal use” by each taxpayer.
- Unless a fair rental is received, any period of rental of a vacation home is considered to be â€˜personal use’ by the taxpayer.
It generally is to the taxpayer’s advantage to avoid having a dwelling unit classified as his â€˜home,’ because it would subject rental deductions to the gross rent loss limitation. Therefore, most tax planning strategies involve controlling the variables of the fixed formula: rental days and personal days.” (Meisner, Robert (2005). Condo Living: A Buyers Guide to Buying, Owning, & Selling a Condominium. Troy, MI: Momentum Books)
For more information on how to purchase Condo Living: A Guide to Buying, Owning, and Selling a Condominium, please visit www.meisner-law.com or call 800-470-4433.