Tax Planning Strategies for Your Vacation Rental Success

Welcome to another Your Net Worth In Focus blog! KatzAbosch’s Personal Financial Services Team provides tax advice and personalized financial planning for every stage of life. We stay informed on the latest regulations to help you maximize your earnings and secure your financial future.

Watch the video or read the article below to learn how to set up your vacation rental for success.

Tax Planning Strategies for Your Vacation Rental Success

By understanding the distinctions between personal and rental use, and leveraging deductions effectively, you can maximize your financial benefits. This article explores essential tax planning strategies to ensure your vacation rental success, including how to handle expenses, understand acquisition debt, and stay informed about current tax laws. Let’s dive in and unlock the financial potential of your dream vacation home.

Do you have a vacation home or are you currently thinking about buying one? Consider using it as a mixed-use property.

What is a mixed-use property?
Mixed-use properties are dwellings that you can use as both personal getaways and short-term rentals. It’s a great way to enjoy your vacation home while potentially offsetting the costs with rental income. Plus, there’s the long-term benefit of potential property appreciation.

If you use the property for personal purposes more than either 14 days or 10% of the days it’s rented out, the IRS considers it a residence. This means you’ll need to separate the rental income and expenses from your personal use for tax purposes.

Handling expenses
When you rent out your property, a portion of your expenses become tax-deductible. To claim these deductions, the IRS requires separating expenses between rental use and personal use.

There are two main schedules used:

• Schedule E is where you report the rental income and deduct the rental portion of expenses like utilities, maintenance, repairs, insurance, mortgage interest, real estate taxes, and even depreciation. Think of it as the expenses directly related to earning the rental income.
• Schedule A (when applicable) is where you would deduct the personal portion of expenses like real estate taxes and mortgage interest, depending on your personal tax situation.

The main thing to remember is that you can only deduct the portion of expenses that relates to the time the property is rented out. Any excess expenses can be carried forward and used in future years with additional rental income.

It is important to remember that the Tax Cuts and Jobs Act (TCJA) of 2017 may impact the personal use deductions of your vacation rental property. You should keep in mind that all state and local taxes; including property tax of personal use and residence, is limited to $10,000.  In addition, an interest deduction from acquisition debt is limited to $750,000 (MFJ). This is a reduction from the $1 million, pre-TCJA limit.

What about acquisition debt?
Understanding this term can be especially helpful when considering vacation rental properties. This refers to a mortgage secured by your primary residence, a second home, or taken out specifically to acquire, construct, or substantially improve the vacation rental property.

Here’s where the Tax Cuts and Jobs Act comes in. For acquisition debt incurred before December 15th, 2017, there was a higher limit on the interest deduction. However, under current tax law (as of 2024), the interest deduction for acquisition debt is limited to $750,000 for married couples filing jointly.

Key considerations for vacation rental tax rules
It’s important to remember that tax laws can change. The TCJA is currently set to expire at the end of 2025, so future rules around vacation rental deductions might be different. There is an important exception for minimal rental use. If you rent out your vacation home for less than 15 days a year, the IRS considers it more personal use than a rental property. The benefit? You don’t have to report the rental income, and you also don’t need to claim any rental expenses.

This can be a big win if your vacation home is in a popular spot, especially during peak seasons or events like the Masters or the Superbowl.

How KatzAbosch can help
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