Vacation Home or Income-Producing Investment?

Considering buying a second vacation home? While renting can be lucrative, you need to consider the tax implications.


For example, all rental losses are “passive losses” and can only be written off against income from other passive activities like other rentals. Those passive losses that you can’t use are carried forward until you sell the vacation home.


For 2019, the IRS says you can deduct up to $25,000 a year if: Your adjusted gross income is less than $100,000


You actively participate in the management of the property. In terms of selling your vacation home, properties in popular areas tend to see higher-than-average appreciation. If you sell before a year has passed, you will be subject to short-term capital gains. If after a year, your federal tax will be calculated at the long-term rate.


KEY TAKEAWAYS

If you own a home and rent it for fewer than 15 days, you don't have to report the income. However, the IRS considers a second home an investment property if you spend less than two weeks in it and then attempt to rent it for the rest of the time.


The IRS deems a second home an investment property if you spend less than two weeks staying in it and attempt to rent it for the rest of the time. Rental losses can only be written off against income from other rentals, a private partnership you don't operate or an S-corporation. The length of time you have owned a vacation home affects what capital gains taxes you pay.



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