Things You Should Know If You Own A Vacation House For Rental And Personal Use

Do you possess a second property that you alternately are using for holidays and rent out? The IRS wishes to determine how long you spend doing both of these tasks since the answer may affect your federal income taxes.

If you own a residence that is not part of your primary home, that’s where we come in. In this article, you will understand how tax law considers a mixed-use holiday property and classify it as a personal residence. 

The Tax Cuts and Jobs Act (TCJA) contains two significant modifications that may have a detrimental impact on vacation houses that are designated as personal residences.

But wait, there’s more! The way you utilize your vacation home during the year might also have an impact on your federal income tax results. Here’s what you need to know, beginning with some background information.

Vacation House As Defined By Tax Law

The vacation homes that you used for either residential or rental used is classified under the vacation home rules as:

  • Rental Properties
  • Personal Properties

To avoid turning this post into a book, we will simply discuss the vacation house personal residence in this instant. Regardless of where it is located, a mixed-use vacation house is deemed a personal residence when you:

  • Utilized the property for more than 10 percent of the days you rented the house from the market 
  • During the year, you can rent it for more than 14 days.

Here are some additional criteria to take note of:

  1. Counting The Number Of Days Used

    Only actual personal and rental occupancy days are counted to determine if your mixed-use property is subject to vacation home laws. Ignore vacancies and days spent mostly on repair and maintenance tasks.In general, personal use refers to usage by the owners, family members, and any other party who charges less than reasonable market rental costs.

  2.  Concerns Within The Family

    If it is used by a family member regardless if they paid you or not at a fair market value, it is still considered as personal use.

  3. Trouble With Swapping

    If another person uses your house under a bilateral agreement, such usage is deemed personal whether or not the person is paying you a reasonable market price to use your property and vice versa.


Allocations Of Personal Residences For Vacation House Use

When the vacation home regulations convert your mixed-use property into a personal residence, the TCJA restrictions on tax deductions for property taxes and mortgage interest apply from 2018 through 2025.

The primary criterion establishing whether your vacation home is a personal residence is that the costs expenses related to the rental use of the property should not surpass the property’s gross rental revenue. In other words, rental costs cannot result in a tax loss on Schedule E of your Form 1040 for the applicable tax year.

That is correct, however, we want a mechanism for allocating expenses between personal and rental use. The tax code includes such an allocation mechanism as well as the associated tax return treatments, which are as follows:

Step 1. Calculate Your Gross Rental Revenue

Gross rental revenue is calculated by deducting expenditures for obtaining tenants, such as Broker charges and marketing expenses, from gross rental receipts. Fill out Schedule E of your Form 1040 and report the amount.

Step 2. Utilize The Real Personal And Rental Days Used

Use the total days of rental and personal use to distribute payments on the house purchasing loan and real estate taxes to rental and personal use. Subtract the rental part on Schedule E to the degree it doesn’t exceed gross income. Subtract personal stake and real estate taxes on Schedule A.

Step 3. Subtract On Schedule E

Deduct on Schedule E costs expenses related to rental use excluding some who would result in a base modification, such as insurance coverage, HOA fees, utilities, and repairs.

Step 4. Depreciation And Other Adjustments Are Deducted

Subtract depreciation and other modifications to the degree that they do not exceed the rental’s gross revenue. If depreciation is restricted, lower the tax basis of your home solely by the amount that is now deductible.

Step 5. Any Prohibited Costs Should Be Carried Through

Carry forward any disallowed costs attributed to rental usage from Steps 3 and 4 to the following tax year. In that year, the costs are again limited depending on the total rental income for the same year. 

If you sell the property, you should be able to utilize the proceeds attributable to the rental-use component of the property to “free up” prior-year disallowed costs allocable to rental use.

Start Making Plans For Your Vacation House This Year

Between now and the end of the year, you may be able to control the number of rental and personal-use days. Your post-pandemic consumption pattern can be different from the usual. That usage pattern may result in better or worse tax consequences, particularly if it converts your vacation home from the personal residence category to the rental property status or vice versa.

For example, you and your family may want to spend more time at your vacation home and less time in the city. As a result, your vacation property may be classified as a personal residence. If this is the case, increasing the number of personal-use days may enhance the present itemized deductions for eligible dwelling interest expenditure and property taxes.

However, if you are subject to the TCJA restrictions on qualified residence total liabilities and property taxes, adding more personal-use days may simply result in larger personal-use allocations of interest expense and real estate taxes that you cannot currently deduct as itemized deductions due to the TCJA limitations. The tax consequences will be determined by your specific situation. 

Summing It Up

You must be aware of the vacation home restrictions if you utilize the property for both personal and rental reasons.

In addition, the TCJA restrictions on itemized deductions for eligible dwelling interest and property taxes for tax years 2018-2025 complicate the decision-making process.

As you’ve seen, the vacation house tax may be somewhat confusing. Consider contacting a tax professional to help you how to achieve the greatest tax outcomes for your particular scenario.

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