Will your 1040 help pay for your vacation home?
English: Sunburst Lake with Sunburst Ranger Cabin in Mount Assiniboine Provincial Park, British Columbia, Canada (Photo credit: Wikipedia)
People who buy a vacation home often need an excuse to help overcome their better judgment. Sometimes the idea that they will get some deductions out of that lake cabin is enough to push them over the edge. But is it so?
Yes, there are tax breaks for second homes. The biggest one is the home mortgage interest deduction, available for up to two homes, to a maximum of $1.1 million in debt. You can also deduct property taxes, at least if you aren't subject to alternative minimum taxes. But what about the home itself, and your out-of-pocket costs? Can you claim the cabin as a rental property, deduct depreciation, insurance, and maintenance, and move your property taxes to an "above-the-line" schedule E deduction? Probably not.
To get beyond home-mortgage and property-tax deductions, you need to claim rental losses. Under the "passive loss" rules, rental real-estate deductions are normally "passive." Short-term rentals can avoid this rule, but then you have to show "material participation" in the short-term rental activity. Unless you are on-site, that's hard to do, and probably impossible if you have an agent helping you with the rentals.
More problems arise if you actually use your vacation home. The tax law has a rule that limits "business" deductions from a rental property when you use the house personally for the greater of 14 days or 10% of the days the property is used or rented.
There is one break that can be easily available. If you rent the vacation unit for less than 15 days, you get to exclude the rent from taxable income. But two weeks rent won't do much to make the monthly payments on the cabin.
The Moral? If you buy that north-country cabin, don't look for a lot of help from the IRS to help pay for it. If you really need the deduction to make it work, talk to your tax advisor before you commit.