Vacation Homes After Tax Reform: Rental vs. Personal Property, Maximizing Expenses, Conversions, Personal Use

Description

Vacation homes provide a getaway for owners--with rental income or appreciation as a bonus. The tax rules covering these second homes are complicated. Renting the property less than 14 days can provide tax-free income. Personal use of more than 14 days or 10% of the dates rented subjects the vacation home to limitations on expense deductions. Expense deductions are limited to rental income with excess expenses carried forward.

For these homes, tax preparers must consider whether to use the IRS or the court method for allocating expenses and the new SALT limitations. With less than 10% personal use the property might qualify as a rental. For a taxpayer with other passive income or AGI less than $150,000, a rental property classification could provide a tax deduction.

These second homes sales are subject to the rule of "heads you lose, tails the IRS wins." Gains are subject to tax; losses are not deductible. At the same time, gains of $500,000 and $250,000 from the sale of a personal residence are excludable by married and single taxpayers respectively. Converting a vacation home to a personal residence can generate significant tax savings.

Listen as our panel of experts provides insights into classifying vacation homes, converting these homes to residences, and allocating expenses to maximize tax deductions. The classification of these getaways is critical to deduct current expenses, minimize rental income, exclude gains on sales and recognize losses.