DEFINITION of Vacation Home
A vacation home is a dwelling other than the owner's primary residence that is used for recreational purposes, such as vacations. Because vacation homes are only used at certain times, many owners might rent out these dwellings when they are not using them. For example, a couple living in Maine might occupy a vacation home in Florida during Maine's coldest months and rent it out to other people for the rest of the year.
BREAKING DOWN Vacation Home
Mortgages on vacation homes typically have higher interest rates than mortgages on one's primary residence, because they have a higher risk of default (in the event of a reversal of fortunes, individuals are more apt to save their primary residence than a temporary one). Nevertheless, most of the other perks of home ownership still apply, although the restrictions are a bit tighter. If one does rent out the vacation home, then there are limitations as to how long the owner can reside there and still deduct rental expenses. The sale of a vacation home does not allow for the same income tax deductions as the sale of a primary residence does.
How Vacation Homes Are Classified in Tax Filings
If a vacation home or other dwelling is rented out for 15 days or more per year, the rental income must be reported to the Internal Revenue Service using Schedule E. Expenses associated with that residence may be deducted. If the home is considered to be a personal residence, the deducted expenses cannot exceed the rental income. If the vacation home is not a personal residence, the deducted expenses can exceed this threshold, but the reported loss may be limited by passive-activity regulations.
In order for a vacation home to be classified as a residence, it must offer basic living accommodations including sleeping space as well as cooking and bathroom facilities. The home must also be used for personal purposes for more than 14 days and 10 percent of the total number of days the home is rented at a fair rental value.
If those requirements are met, the vacation home tax rules for a residence will apply. Deductible expenses would include the rental portion of qualified home mortgage interest, real-estate taxes, and casualty losses. Other expenses that can be deducted stem directly from the rental property and include advertising for the property, payment of commissions, legal fees, and office supplies. Expenses related to the maintenance and operation of the rental property are also deductible.