Archive for Vacation Homes

Personal Property or Rental Property: How to Get the Most Savings from Your Vacation Home

Your vacation home provides you with the benefits of relaxation and time away from the busy day-to-day responsibilities. But, if you play your cards right, it can also be a source of income and tax savings. After all, there’s no real reason to leave your vacation property sitting vacant when you’re not using it. And, this allows you to take advantage of the repair-day tax benefit.

IRS Rules Regarding Rental Property

You won’t be surprised to know that the IRS has a few rules about treating your vacation home as rental property. You see, just because you rent out the property doesn’t necessarily mean that it qualifies as a rental. It’s all about how the numbers play out. When your vacation home is used for both personal use and as a rental property, tax law still classifies your home as personal property if you use the home for personal purposes more than 1) 14 days, or 2) 10 percent of the number of days it was rented out (at a fair market price) to someone unrelated to you, whichever is greater.[1]

Here’s an example of how such a situation may play out:

Non-family members rent your vacation home for 180 days of the year. You personally stay in the home for 17 days out of the year. This gives you 90.6 percent rental use and 9.4 percent personal use. Regarding taxes, you’ll simply treat 90.6 percent of the property as rental property and the remaining percentage as a personal home.[2]

Figuring in Repairs

So, you’ve counted the rental days and the days of personal use. But, are any days used for something else? Certainly! If you’re renting out your property, you’re more than likely taking some days to make repairs. For tax purposes, the repair day counts in neither the personal nor the rental days. It’s a non-use day.[3]

In fact, as long as you spend the majority of any particular day making repairs, it counts as a repair day regardless of anything else that you or anyone else is doing on the property that day.[4]

To this IRS, this means:

  • Any day for which your primary purpose lies in making repairs or providing maintenance to your vacation home, you are not considered to be using the home for personal purposes;[5] and
  • Any time that you make repairs or provide maintenance to your vacation home on a substantially full-time basis for any given day, it is not a personal day. (Now, the IRS does not state this, but according to the law, your repair day counts no matter what the rest of your family is doing during the time you are working on repairs.[6])

Those regulations sound pretty good, so how do they play out in actual situations? Well, before we explain that, let’s just make clear that IRS regulations are not the law. Lawmakers have already passed legislation regarding repair days, and the IRS regulations are partly based on those laws. Here are a couple of examples of what the IRS regulations would mean for your repair activities:

  1. Let’s say that you and your spouse drive out to your vacation home and arrive on a Thursday evening in order to spend Friday and Saturday making repairs for the upcoming rental season. You eat dinner at the vacation property, but don’t start on any work Thursday night. On Friday and Saturday, you spend 8 hours each day working on property repairs. Your spouse helps out with a few tasks, but does not spend the majority of the time working. You both leave a little before noon on Sunday.

Which days count as repair days? All of the days do—Thursday through Sunday.[7]

  1. As another example, you own a mountain in the cabins and rent it out throughout most of the year. For one week, you and your family stay at the cabin, and you spend 3 to 4 hours each day performing maintenance. The rest of the time is spent relaxing, hiking, and fishing. Per the above regulations, you spent substantially full-time working on the cabin, so your entire week is a repair week, not personal use. The relaxation and leisure activities make no difference.[8]

Note that in each of the examples based on IRS regulations, all the family members (you included) worked at least a little bit in both examples. Under the actual laws regarding these situations, that is not required. According to the law, your family does not have to participate in any repairs to your vacation home in order for you to claim those days as repair days.[9] The IRS may try to make these rules sound vague, but the law is clear—you are entitled to use your repair days when counting personal versus rental use.

  1. IRC Section 280A(d)
  2. IRC Section 280A(e)(1)
  3. Prop. Reg. Section 1.280A-1(c)(1)
  4. IRC Section 280A(d)(2)
  5. Prop. Reg. Section 1.280A-1(e)(6)
  6. Robert J. Twohey, TC Memo 1993-547; IRC Section 280A(d)(2)
  7. Prop. Reg. Section 1.280A-1(e)(7), Example 3
  8. Prop. Reg. Section 1.280A-1(e)(7), Example 4
  9. IRC Section 280A(d)

Increase Deductions on Your Vacation Home with a Hidden Tax Technique

Usually, when you want to research which tax deductions are available to you, you go to the IRS’s publications and tax regulations documents. The IRS can even be pretty helpful at times by letting you know exactly what you need to do in order to get your deductions. However, the technique in this article won’t be found in any of the typical tax literature. In fact, you’d only find it if you’ve been reading up on old court cases or tax treatises.

The Precedent

So, how does this tax tactic help you if it’s not approved in IRS documents? Aside from the typical sources for supporting your deduction strategies, you can also use tax court precedents. In 1981, Dorance and Helen Bolton found their money trapped behind vacation home deduction limits, but they decided to get creative and find a way around those limits.

Because they set this precedent, you can legally use the same technique today, even though the IRS doesn’t publicize it for everyone’s use. In fact, the IRS’s calculation methods for vacation homes are much more stringent. Nevertheless, the IRS is required to allow the method used by the Boltons because the tax court has ruled it a legal tax strategy.

How this Money-Saving Strategy Works

Do you have a second home, a ski cabin or beach house for example, that you both rent out and use for your personal use? If so, you’ve probably found that the vacation home rules cap the deductions allowed for rental expenses.[1] Additionally, for properties that qualify as a “residence” those rules are at their most stringent. Your property is considered a residence for tax purposes if you take advantage of its personal use for the greater of the following two time periods:[2]

  • More than 14 days in a year, or
  • More than 10 percent of the days you rent it at fair rental price during the year.

You see, when your home qualifies as a residence, you have to split your deductions between residence and rental property, and that creates two primary disadvantages for you: 1) your rental expenses are limited to your rental income, and 2) part of your mortgage interest and property tax deductions are considered rental expenses, which—because of the limit in #1—reduces the amount of other rental expenses you are able to deduct.

Now, here’s what the Boltons did to mitigate these disadvantages. They were able to come up with a way to decrease the amount of mortgage interest and property taxes that counted as rental expenses. Let’s take a look at how their method differs from that of the IRS:

  • IRS MethodCount the property’s total use. That means of your tenants rent the property for 75 days and you personally use it for 25, you divide the rental use days by the total number of days, 100. The use percentages divide up as 75 percent rental and 25 percent personal. Assuming your mortgage interest and property taxes come to $10,000, you must count $7,500 (i.e. 75 percent of $10,000) towards the rental expense limit.
  • Bolton MethodDetermine percentages for the entire year, not just for days of use. With this calculation, you take that same 75 days of rental use and divide it by 365 days, giving you only 21 percent rental use for the year. Again, given $10,000 in mortgage interest and property taxes, you now take 21 percent of that, getting a rental expense total of only $2,100. The Bolton method leaves you with an additional $5,400 of rental expenses that can be deducted.

To see how the numbers work out after deductions, here’s the Boltons’ case:[3]

  • 91 days of rental use
  • 30 days of personal use
  • 244 unoccupied days
  • $2,700 in gross rental income
  • $3,475 in expenses for mortgage interest and property taxes
  • $2,693 in expenses for rental property maintenance

The Boltons were able to claim an additional $1,738 in deductions. Adjusting for today’s dollars, you can save substantially more than that. This case has been on the books for more than 30 years and remains seldom-used, but the IRS is required by precedent tax law to allow it.[4] Now you know the secret, so start claiming your full rental deductions on your vacation home this year.

  1. IRC Section 280A(e).
  2. IRC Section 280A(c)(5) and (d)(1).
  3. Bolton v Commr., 77 TC 104, aff’d 694 F.2d 556 (9th Cir.).
  4. McKinney v Commr., 732 F.2d 414.