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For vacation home tax break, IRS insists you have fun

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.

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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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