Tax Advantages of Owning Vacation Property

by Gregory Hamel

Owning a vacation property can be a way to invest while providing you with a home away from home. A vacation home will let the owner save on the cost of lodging at hotels and can become a source of additional income by renting the home out to other vacationers. Vacation properties might also be eligible several money-saving tax deductions.

Mortgage Interest

The mortgage interest paid toward a vacation home may be tax-deductible, just like the mortgage interest you pay on your main residence. The IRS states that in order for a vacation property or second home to be eligible for deductible mortgage interest, the property must be used to secure the loan and the property must have basic living amenities such as a place to sleep, a kitchen and a toilet. While most homes fit these guidelines, the interest deduction can also extend to vacation property such as recreational vehicles, boats and timeshares that are secured with a mortgage. The interest deduction for mortgages is limited to the primary residence and a single vacation property or second home. For instance, if you have a cabin and an RV, you would be able to deduct the mortgage interest on only one or the other.

Rental Property Deductions

If you decide to rent out your vacation property, certain expenses associated with renting the property may be tax-deductible. According to the Internal Revenue Service, expenses including interest, taxes, casualty losses, maintenance, utilities, insurance, and depreciation may be deductible, which will serve to reduce the amount of rental income that is taxed. In order to claim these deductions, the property must be considered a dwelling unit. The IRS states that a vacation property is considered a dwelling if you use it for personal purposes during the tax year for more than the greater of 14 days or 10 percent of the total days it is rented to others at a fair rental price. In other words, if you only rent out the property but do not use it yourself, you will not be eligible for the deductions.

Property Tax

Property taxes paid on vacation properties are tax-deductible. Unlike the mortgage interest tax deduction, which is limited to a single vacation property, property tax is deductible on any number of vacation properties. This helps reduce the burden of owning and holding several properties as investments or rental units.

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