Vacation Home Tax Deductions

Vacation Home Tax Deductions

Published on June 09, 2021

Vacation Home Tax Deductions

Do you know of all the vacation home tax deductions that may apply to you? 

Business-Lodging Exemption

If your vacation home is used exclusively for business lodging purposes, you can deduct your business-lodging expenses. Provided you have no personal or rental use of it, your vacation home is considered a 100% deductible business asset. Section 280A(f)(4), states that nothing in the vacation-home rules shall disallow any business any deduction for business travel. However, the law does not grant the business-lodging exception to landlords who rent dwelling units. Therefore, staying at your vacation home to look after your rented units does elude the disadvantageous vacation-home rules. 

What if it is Rented?

Often taxpayers get confused on whether their vacation home is considered a rental property, mixed-use property, a second residence. The tax benefits to which an owner may be entitled depends upon the number of days each year that the property is rented out, and how much time the owner spends in the home.

So if you use your vacation home or condo for personal, business and rental purposes, you could trigger:

  • Vacation-home rules that require a split between the rental and personal use deductions
  • Vacation-home rules that classify the rental part of your property as either a personal residence or a rental property
  • Loss of tax-favored hotel status for qualified rentals; and
  • Passive-loss rules that defer current tax benefits to future years. 

Wondering if you can still rent out your vacation home or condo while avoiding all these considerations? Short answer is Rent for 14 days or less. Technically that works.

However, there’s no clear guidance by the Congress or the IRS for properties with mixed use – personal, rental and business – during the year. For taxation purposes, it is logical to deduct the business portion under the business rules and the personal and rental uses under the vacation-home rules.

Food and Entertainment?

Thinking of incorporating entertainment in the utilization of your vacation home or condo? Forget about it! Under the Tax Cuts and Jobs Act, business entertainment is no longer tax deductible. So hosting parties or a sporting event in your property will not entitle you of any deductions. 

However, you can still take advantage of business meals as these are not entertainment and remain deductible under the TCJA. You can still serve food and beverages during the business use of your vacation home or condo and be eligible for reimbursements thereafter..

Receipts and Ownership

In addition to keeping receipts for your business vacation home’s expenses, it’s also critical to document  how many nights you slept in the vacation home for personal vs. business purposes. For business activities; documentations such as emails, letters and photos will validate your business use. Furthermore, gas, grocery, and dining receipts will solidify your claim.

In terms of ownership, as long as the ownership of the vacation home or condo is under your name and you operate as:

  • Proprietorship or LLC taxed as a proprietorship. Simply treat the business percentage as business expense on your Schedule C
  • Corporation. Submit an expense report to the corporation to obtain reimbursement.

Thinking of using a rental arrangement with your corporation? It may be unfavorable to you as it will cost you depreciation, repairs and similar expenses. However, if the corporation owns the vacation home or condo, you should reimburse the corporation for your personal use so as to avoid the bucks showing on your W-2 and increasing payroll taxes on both you and your corporation. The reimbursement method works and creates no complications. Use it.

A vacation home offers a break from the daily grind, but it can also offer a tax benefit. The tax law allows most owners to lower their taxable income by claiming tax deductions for the business use of their vacation homes. If you’re thinking about buying a second home for vacations, rental income, or an eventual retirement residence, it makes financial sense to take advantage of all the available tax breaks and deductions.

If you are interested to learn more about ways you can increase your tax deductions and lower your tax, schedule a free consultation. 

 

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