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Vacation Home Rental Write-Offs Get Personal

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Clients who rent out vacation homes can generally write off qualified vacation home expenses. However, if their personal use exceeds the tax law limits, they can’t deduct an annual loss. This could affect the way they use their vacation home for the rest of 2021.

Jul 19th 2021
Columnist
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Are your clients back to spending more time at their vacation home this summer?  They should know that if they rent out the home part of the time, this might cause tax complications. Let’s start with the basic rules and dig in deeper from there.

Basic rules: Normally, rental income from a vacation home is taxable, but certain expenses—like mortgage interest, property taxes, repairs, utilities, insurance, etc.—may be deducted against the income. (Depending on their situation, mortgage interest and property taxes may otherwise be wholly or partially deductible on their personal return for a qualified residence, subject to other tax law limits).

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If their annual rental is for just two weeks or less, they don’t have to report any rental income to the IRS, nor do they deduct offsetting expenses. But things get a little trickier if they rent out the place for more than 14 days and still use it personally. In this case, they must pay tax on all of the rental income, while they can deduct only a portion of their expenses.

Significantly, they must allocate costs between “business use” and “personal use” days. Each day the home is rented to a stranger at a fair rate counts as a business use day. Conversely, if they spend a day of R&R at the home, it counts as a personal use day.

Example: They rent out the vacation home for 80 days in 2021 and the family uses it personally for 20 days. Accordingly, they can deduct 80 percent of their qualified rental expenses (see above), as well as the full cost of a rental agent or property manager.

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