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This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

TAXING RENTAL / VACATION HOMES

There are three possible tax consequences depending on the number of days the property is rented at Fair Market Value.

FIRST, if the second home is not rented more than 14 days per year, it is not a rental. Mortgage interest and property taxes are normally 100% deductible. The rental income is not taxable; however, no deductions are allowed for other expenses or depreciation.

SECOND, if the vacation home is rented for more than 14 days per year, AND personal use is limited to 14 days (or 10% of the total rented days, if greater), the property is taxed as two properties: a rental for the portion it is rented; and personal use, but not a second home, for the period it is used personally.

Rental portion: All expenses are allowed, subject to the Passive Loss Rules. [Passive Loss Rules may not apply if the average rental is 7 days or less.]
Personal use portion: Mortgage interest is investment interest (deductibility is limited); property taxes remain deductible.

THIRD, if the property is rented for more than 14 days AND personal use exceeds the 14 day/10% limitation, the property is taxed as both a second home and a rental.

Rental portion: Expenses attributable to the rental period are allowed to the extent of income; no net losses are allowed.
Personal use portion: Interest and property taxes are deductible.

Examine the benefits under each scenario and alter your rental/usage plans to minimize taxes.

VACATION HOME TO CHARITY AUCTION

In a recent Tax Court case a charitable donation turned into a triple tax loss. The donor gave a charity a one week use of a vacation home for a charity auction. The week was sold and the funds were used for charity.

1 - The donor could not deduct anything. [A gift of the right to use property is not normally deductible.]

2 - The renter could not deduct his payment (made by check, payable to the charity). Charitable deductions are allowed only to the extent that value is not received. [Example - If you pay $3 for cookies worth $2, only $1 is deductible.]

3 - The donation was a personal use, causing the donor's personal use to exceed the 14 day/10% rule causing a tax increase.

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