Own a Vacation Home? Enjoy Some Tax Breaks!

According to the US Census Bureau, the homeownership rate in the country reached an all-time high of 69.2% in 2004. During this housing boom, many homeowners were able to buy second homes which they converted into vacation homes. Real estate business people also took advantage of the trend and invested heavily in vacation homes. So it's not uncommon to hear people talking about owning a beautiful cottage in the country, a deluxe villa by the beach, or a simple, quite home in a small city -- all for vacation purposes.

But a year later, the housing bubble burst. During the last quarter of 2005, the booming housing market came to an abrupt halt (source: CNN.com). By the end of 2005, close to 850,000 properties were in foreclosure (source: RealtyTrac.com). Many are now wondering if it's still profitable to own a second home for vacation purposes. Homeowners who decide to rent out their second home can earn from it and enjoy some tax breaks.

Taxes are imposed on a vacation home's rental income. How much tax depends on how often the property is used by the owner, how often it is rented out, and how long it stays vacant in a given year. Rental income is not taxable if the vacation home is rented out for no more than 14 days within the year. Also, income from renting it out need not be reported.

On the other hand, if the vacation home is rented out for more than 14 days, the rental income will be taxed but the allowable deductions are based on the owner's personal use of the property. If the vacation home is used for 14 days at most or 10% of the total number of days it was rented out, whichever is greater, all expenses on the rental can be deducted subject to the Passive Loss Rules. It's best to discuss this with a tax professional. If the vacation home is used for more than 14 days or 10% of the days it was rented out, the owner is allowed to deduct expenses only up to the extent of the rental income.

Feeling overwhelmed by the specifics of tax rules on vacation homes? Research further on the matter or consult with your accountant or tax expert. You should really know how taxes are going to affect your income from renting out a second home. If you want your vacation home to be a property that is self-sustaining, you need to make a few key decisions. For instance, if you want to rent out your property, aim for no less than 15 weeks occupancy out of the year. Advertise its availability in online and offline media. This should help make your 15 weeks target achievable. You can also directly manage the rental of your vacation home so you won't have to pay commissions to middlemen.

All things considered, it can be difficult to make a second home earn for its own upkeep. Then again, if the reason you bought it in the first place is for your personal enjoyment, you might as well make full use of the tax privileges on your property, particularly mortgage interests and property taxes that remain 100% tax-deductible. On the other hand, if your objective is for your vacation home to be another source of income, you will have to give way to renters even at times when you want to stay there.