Create Tax Deductions on Your Vacation Home
Do you own a vacation home? If yes, did you know that you might be able to deduct a number of vacation home expenses on your business tax return?
If your business uses your vacation home or condo exclusively for business lodging purposes, you elude the vacation-home rules and allow you to deduct your business-lodging expenses.
So let’s say you own a beach home somewhere and you use it 33 times during the year for overnight business lodging. Provided you have no personal or rental use of it, your beach home is considered a 100% business asset and deductible as such. The law is very clear on this – Section 280A(f)(4), states that nothing in the vacation-home rules shall disallow any business any deduction for business travel.
One exception to the rule, the law does not grant the business-lodging exception to landlords who rent dwelling units. So staying at your vacation home or condo to look after your rented apartment or residential units does not let you escape the disadvantageous vacation-home rules.
What if it is Rented?
Often taxpayers get confused when they purchase a vacation home and they need to determine whether they have a rental property, mixed-use property or is it treated as a second residence (personal) property. 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
Aside from keeping receipts for the business vacation home or condo’s expenses and improvements, it is also critical to document how many nights you slept in the vacation home or condo for both personal and business purposes. For your business activities, documentations such as emails, letters and photos will validate your purpose of why you had to travel to your beach home. Also, evidence such as gas, grocery and dining receipts will help you solidify your claim that you are indeed in your vacation home location.
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.
Avacation 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, use this link to schedule a call with one of our team members.
If you wish to subscribe to our newsletter “MyCashZone” to receive tax tips and financial advice directly to your inbox, please use this link to sign up.