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For vacation home tax break, IRS
insists you have fun
By Cora
Barnhart • Bankrate.com
Many
taxpayers know that home
mortgage interest is one of their most valuable deductions. They're
less likely to be aware of the rules for deducting interest paid on
a vacation dwelling.
Deductible or not?
To qualify for this tax break, the Internal Revenue Service insists
that you have fun. You can't just be all business all the time.
In other words, for a second property to qualify
for the home mortgage interest deduction, the taxpayer must use
the additional home for personal purposes during the year.
Suppose a couple has a second home they rent
out all year, and they never use it for their own vacations.
Sorry -- no fun, no tax break. The property
wouldn't qualify as a second home for the purpose of the home mortgage
interest deduction. The IRS will categorize it as rental property
if it is rented, or investment property if it isn't rented.
Getting
personal
Many taxpayers have second properties that are part personal and
part rental. In this scenario, they are more likely to qualify for
the tax break. The catch is that the IRS requires their personal
use to exceed 14 days or 10 percent of the time it was rented, whichever
time length is greater.
Consider the case of a time share unit. There
are circumstances under which the IRS would perceive it as a second
home instead of as a rental property.
Suppose a taxpayer gets to use the property
for four weeks. She uses it three weeks and rents it out the fourth
week.
Under this set of circumstances, the time share
qualifies as a second home. The time it is used for personal purposes
exceeds the 14-day minimum. The 21 days is also more than 10 percent
of 28 days.
Simply put? For every 10 days you rent a property,
the IRS expects you to use it for personal purposes for one day.
When
a home isn't a home
Don't fall into the trap of assuming that a second home has to consist
of the traditional combinations of bricks, mortar and/or wood.
A second home can include a time share unit, a boat or a recreational
vehicle. The catch? These dwellings must include sleeping, cooking
and toilet facilities. Interest paid on your second home is deductible
if you meet these prescribed tests.
So, if you're on the line between a boat with
and without a head and galley, think twice. Going with the bathroom
facilities could mean the difference between deductible and nondeductible
interest.
For more examples and further explanation, see
IRS Publication
527.
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