We all love the idea of living large, and what better way to embrace luxury than by owning a lavish vacation home? These splendid retreats not only offer a sanctuary away from the chaos of daily life but also come with the added benefit of providing an income stream.
However, like other income-generating assets, vacation homes are subject to taxes, as explained in this blog. Of course, there are tax deductions you can take advantage of. It's essential to understand the rules and regulations surrounding these deductions to ensure a seamless filing experience.
Definition of a vacation home
A vacation home is a secondary residence usually owned by an individual or via a joint partnership that can be rented out to earn monetary benefits. Vacation homes differ from secondary homes, which are usually purchased for personal use. In order to qualify as a vacation home, a
property must meet certain criteria as dictated by the Internal Revenue Service. It must be used for recreational purposes rather than as a primary home. Another condition is that it must be used for less than 14 days per year or 10% of the total days it is available for use, whichever is greater. If the property is rented out for more than 15 days per year, the income generated must be reported and taxes paid. Subsequently, various tax deductions can be claimed, including the following.
Mortgage interest
The only caveat is that homeowners can only write off interest on loans up to $750,000. This limit only applies to married couples filing jointly, single filers, and heads of households. For married couples filing separately, they can only claim interest on loans up to $375,000 each. Other than those limits, the property must qualify as a vacation home, as explained above. It's also worth mentioning that owners can write off interest for several types of loans, including home-buying and improvement loans.
Property taxes
Property taxes are a significant expense for homeowners, especially vacation homeowners who use them as secondary residences. The good thing is that they are allowed to write off their property taxes as an expense, allowing them to reduce their taxable income. By understanding the parameters under which property taxes can be written off, vacation homeowners can alleviate some financial burdens.
While only
$10,000 worth of property taxes can be written off in the case of primary residences,
vacation homes are treated to an increased limit of $25,000. Simply put, if the owner pays over $25,000 in property taxes for the year, they cannot claim the entire amount. A point to note here is the cap includes property tax and
SALT deduction (state and local taxes).
Depreciation
In the world of real estate, time does indeed hold its sway on structures, as opposed to land. This is why the Internal Revenue Service has allowed vacation homeowners to claim depreciation as a deduction when filing their annual returns.
The word depreciation is defined in the Internal Revenue Code as any method of allocating the cost of tangible property over the recovery period. Simply put, depreciation is a tax deduction that allows vacation homeowners to recover from taxes the costs of their property over a period of time, accounting for the wear and tear that occurs due to regular use. The Internal Revenue Service allows owners to depreciate their vacation homes using a
straight-line method over 27.5 years, whereby equal amounts are deducted for each year of the recovery period.
In order to benefit from this deductible, the vacation property must be rented out for a significant portion of the year to generate rental income. An important point to keep in mind is that it is only the structure of the property that's depreciable, not the land.
Maintenance expenses
Maintenance costs can be classified into two categories: recurring and non-recurring. Recurring maintenance costs stem from regular expenses usually levied year after year, such as utilities. They also include routine repairs intended to keep the property in good working condition, such as HVAC servicing and electrical work. These do not add significant value or extend the property's useful life and can therefore be deducted in the year they are incurred.
Also referred to as capital purchases, non-recurring maintenance costs are incurred as a one-time expense to add value to the property. For these, tax deductions are a complex process, with some projects, such as fire protection and security systems, being tax-deductible.
Home office
For those who use a portion of their vacation home for business purposes, there is a potential tax deduction known as the home office deduction. In order to qualify for this deduction, the space must be used exclusively and regularly for business purposes. It should be where the homeowner primarily conducts business activities, including administrative tasks and meeting clients.
There are no rules regarding whether it should be a separate room entirely or a designated area of a room, provided it meets the requirements mentioned above. The amount deductible is five dollars per square foot of the office area, up to a maximum of 300 square feet. While it is possible to claim a home-office deduction for the primary and vacation home at the same time, it remains a challenge, given the requirements.
Buy a vacation home in the vibrant California real estate market today
If you would like to experience California's real estate market in all its glory, Jordan Pollack at LA Luxuries invites you to pursue the ultimate mission of finding a California vacation home. As an experienced California Realtor, Jordan has the knowledge and expertise to find the perfect vacation home for you, whether a beach home, a mountain home, or an urban retreat. Contact him to find California vacation homes for sale.
