Second Home, Vacation Rental or Investment?

By Walt Harvey, 5/10/2006 11:33:51 PM

Hawaii is an attractive location for buying a second home and how you classify that property has significant tax ramifications. Disclaimer: I’m a real estate broker and not allowed to give tax advice so consult with your tax professional regarding your specific circumstances. With that said, here are some guidelines.

A second home is a property other than your primary residence and of course it’s an investment. Any property owned as an investment may fall within the definition of a vacation home. The term vacation home is generic and applies to a property that an individual or family member uses personally to any extent. If there is personal use, tax write-offs may be limited.

14-Day Rule: Vacation homes may be considered residences if used for personal purposes more than 14 days or 10 percent of the number of days during the year for which the home is rented at a fair rental price, whichever is greater. Time spent working on and improving the property is not considered in the 14 day usage.

If a vacation home is rented for 14 days or less during the year and there is any personal use, you can keep the rental income and not report it (Code Sec. 280A(g), however, you can claim no expenses beyond the mortgage interest and property tax.

If rented for more than 14 days, then all rental income must be reported along with deductions for the rent-related expenses like advertising, broker’s fees, utilities, maintenance, upkeep, mortgage interest, property taxes and insurance. Depreciation may be deducted against the rental income however all deductions may not exceed the rental income.

Always consult a tax professional. When considering real estate, consult a real estate professional.