Real Estate Investing

Owning a vacation home packs extra perks besides just a good time. When not in use, vacation homes can add up to major tax savings. The first task is to distinguish between personal use and rental use. Personal use includes a visit by yourself or any family members — even if those relatives are paying money to stay there. Personal use also includes renting the property to a friend at a discounted rate. Rental use is self-explanatory, but also includes any time the property owners spend at the property for the purpose of renovating or improving the property.

Income from property rented for 14 days or fewer within a year is tax-free. Income from property rented 15 days or more within a year is taxable. Calculate 10 percent of the number of days the vacation property was rented out and determine if that number is greater or less than 14. Whichever number is greater should be used to determine how many tax deductions will be granted. For instance, say the property could be categorized as rental use for 40 days of the year. Ten percent of that would be four days, so the number 14 would apply in this case. If the property was rental use for 200 days, ten percent of that — 20 days — would apply because it is a number larger than 14.

Whatever the figure winds up being, the property owner should keep their number of personal use days under that figure if they wish to receive more tax deductions. This is particularly true if the property is technically categorized as rental property, and double bonus if the property owner is actually the property manager. In that case, expense write-offs can tally up to $25,000 in excess of rental income!

For more information, visit the LataRealty blog. And of course, don’t forget that property taxes and mortgage interest on vacation property is tax-deductible, regardless of whether it is ever used for rental purposes. Furthermore, even a boat or RV can be considered a “second home,” provided it has a permanent kitchen, bath and bedroom. Vacation home tax deductions are a relatively complex procedure that will probably require an accountant, but could be well worthwhile in the end.

When it comes to tax time, most people want to claim all the deductions possible. However, many simply may not even realize all the minor details they are overlooking. We’ve discussed the tax benefits of homeownership, but rental property is another area chock full of deductions.

Stephen Fishman has a more complete list with more in-depth explanations of each item in his article on nolo.com, but here are some of the most common rental property tax deductions:

Interest: You can deduct all interest on any loans used for property purchase or improvement, as well as interest on any credit cards used for purchasing related supplies or services.

Repairs: Got a leaky faucet? Broken window? Look on the bright side — the repair costs are tax-deductible!

Travel costs: Your mileage and any dining or lodging expenses related to rental management is tax-deductible. You can either deduct actual costs, or use the standard mileage rate, which is a certain amount of money per mile (48.5 cents in 2007, according to Fishman).

Insurance: Whether you buy flood, fire, theft insurance, or all three, the premiums are fully deductible!

However, if you are getting into the rental market, save receipts as proof in case the IRS decides to audit you. And beware of getting involved in shady real estate partnerships where tax evasion may be involved. Tax trouble will mess you up for years to come, so taxes should be taken very seriously.

We’ve discussed some of your home’s tax benefits previously, but there is even more potential to be explored. The following are some additional hidden tax benefits your home possesses.

Points on mortgage loans are fully deductible. ActiveRain real estate blog network offers a good explanation:

“Points, each equal to 1 percent of the loan principal, are charged by lenders as part of the cost of the loan. You can fully deduct points associated with a home purchase mortgage, but not a mortgage broker’s commission. Refinanced mortgage points are deductible too, but only when they are amortized over the life of the loan. Once you refinance a second time, the balance of the old points from a refinanced loan offer an immediate write off, as you begin to amortize the new points.”

Certain low-income, first-time homebuyers will qualify for a mortgage tax credit — to be substracted directly from the income tax owed — worth up to 20 percent of the mortgage interest payments paid. In 1997, a new law allowed married homeowners who are filing their taxes jointly to keep, tax-free, up to $500 of their profit from selling a home. However, the home had to have been used as the couple’s primary residence for two years out of the past five.

Lastly, the home-based business is a significant tax shelter as well. Self-employment taxes can be overwhelming, but basing the business in your home allows you to deduct much more than the obvious business-related expenses. In addition to office equipment and supplies, you can deduct a portion of the monthly utilities and phone and Internet bills. How much of your monthly bills can be used as a tax deduction is directly related to what percentage your office space comprises of your overall home’s square footage. Check out a more comprehensive list of home-based business tax benefits here.