Tax 5-8, 9 Vacation Home Rules Flashcards
Vacation Home Rules
Clients of financial planners frequently own vacation homes. Indicate the tax treatment of rental income and the allowable deductions for vacation homes in the following situations.
The vacation home is rented for 14 days or less (fewer than 15 days) per year.
Rental income does or does not need to be reported?
(5-8,9, pg 61)
Rental income need not be reported. Deductions for real estate taxes, casualty losses, and mortgage interest are permitted in full as itemized deductions. Deductions are not allowed for rental expenses such as repairs, maintenance, and depreciation.
Vacation Home Rules
If a taxpayer does not meet the residence test with respect to a vacation home and if the rental is an activity engaged in for profit, how are the rental income and expenses treated?
(5-8,9, pg 61)
The deductible rental expenses are not limited to the gross rental income. The deductibility of a loss will be limited by the passive activity loss rules.
Vacation Home Rules
Section 280A of the Internal Revenue Code provides special rules that limit the deductibility of expenses incurred in connection with the rental of a residence or vacation home. The owner’s personal use of the rental property for even _____ day during the tax year will cause application of the “vacation home” rules.
(5-8,9, pg 40, 61%)
one
Vacation Home Rules
If the home (dwelling unit) is rented out for 14 days or less (sometimes phrased as “_____ 15 days”), then the rental income is not required to be included in gross income. However, no deductions directly attributable to the rental are allowed. Deductions allowable in any event, such as mortgage interest, property taxes, and casualty losses, are not affected by this rule.
(5-8,9, pg 40)
“less than”
Vacation Home Rules
The Regulations define a _____ unit as a “house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations such as sleeping space, toilet, and cooking facilities.” Excluded from the definition are units used exclusively as a hotel, motel, inn, or similar establishment.
(5-8,9, pg 40)
dwelling
Vacation Home Rules
If the dwelling unit is rented for more than 14 days and the owner’s personal use per year exceeds the GREATER OR LESSER of (a) 14 days or (b) 10% of the number of days during the year that the home is rented, then the expenses attributable to the rental are allocated. If this residence test is met, then the rental deductions may not exceed the amount by which the gross income derived from the rental activity exceeds the deductions otherwise allowed for the property (interest and taxes).
(5-8,9, pg 40)
greater
In other words, if the residence test is met, the rental activity may not generate a loss. Also, if the rental generates income, such income is not considered to be passive. Personal use of the residence does not include a day on which the taxpayer engages in maintenance and repair of the unit on a substantially full time basis.
Vacation Home Rules
If the vacation home is used by the taxpayer for personal use for more than 14 days a year and is rented for fewer than 15 days a year, the rental income [is or is not] taxable.
(5-8,9, pg 41)
is taxable
Real estate taxes, casualty losses, and mortgage interest are deductible as itemized deductions under the normal rules for a second residence. Expenses attributable to the rental use of the property, such as repairs, maintenance, and depreciation, are not deductible.
Vacation Home Rules
If the vacation home is rented more than 14 days per year and the owner’s personal use per year does not exceed the greater of 14 days or 10% of the number of days rented, then all of the rental income must be included in gross income. Deductions are permitted for a portion of the depreciation, maintenance, and operating expenses. The portion is determined by dividing the number of days rented by the total days used by the owner and renters. Deductible rental expenses are not limited to gross rentals. Mortgage interest and property taxes attributable to the rental use are deductible as rental expenses on Schedule _ of the taxpayer’s return, while property taxes attributable to personal use are deductible if the taxpayer itemizes deductions on Schedule _ of his or her return.
(5-8,9, pg 41)
E, A
The interest attributable to the personal use is not considered qualified residence interest. Instead, it is deemed to be investment interest expense. This investment interest expense is deductible up to the amount of net investment income.
Vacation Home Rules
If the vacation home is rented more than 14 days per year and during the year the owner uses the vacation home more than the greater of 14 days or 10% of the days the home was rented, all of the rental income is reported as _____ income. Deductions allocable to rental use (operating expenses, maintenance, and depreciation) are limited to this gross income.
(5-8,9, pg 41)
gross
The deductions for operating, maintenance, and depreciation expenses are determined in the same manner as that described in the previous paragraph. Any excess deductions attributable to rental use are carried forward and may be applied against future rental income. Any mortgage interest, real estate taxes, and allowable casualty losses that are attributable to personal use are deductible as itemized deductions on Schedule A.
Vacation Home Rules
Assume that James Crawford rents out his vacation home for three months and uses the home for personal purposes for one month. His gross rental income for the three months is $4,500. He paid $1,000 of real estate taxes and $1,500 of mortgage interest on the property for the year. He paid $900 for maintenance and $750 for utilities during the year. Total depreciation for the year equals $2,000.
The order in which deductions are taken is as follows:
(5-8,9, pg 41)
- allocated taxes and interest
- allocated operating expenses
- depreciation and other basis adjustment items
Vacation Home Rules
Module Check
- Which one of the following statements is true regarding a vacation home (second residence)?
a. Net income from the rental of a vacation home is considered to be passive.
b. Expenses are allocated between personal and rental use if the unit is rented out 14 days or less per year.
c. Personal use of the residence does not include a day on which the taxpayer engages in repairs of the unit on a full-time basis.
(LO 5-8)
c. Personal use of the residence does not include a day on which the taxpayer engages in repairs of the unit on a full-time basis.
On a day on which the taxpayer is performing repairs or maintenance on the unit, he or she is not deemed to be using the unit personally.
Net income from a vacation home is not considered to be passive in nature.
Expenses are allocated between personal and rental use if the unit is rented out more than 14 days.
Vacation Home Rules
Module Check
- Which one of the following describes the treatment of a vacation home that is frequently rented and infrequently used by the owner?
a. Deductions are permitted for all of the maintenance and operating expenses, as long as personal use does not exceed 14 days per year.
b. Deductible rental expenses are not limited to gross rental income.
c. Unused mortgage interest and property taxes may be carried over to the subsequent year and used against future income from the rental activity.
(LO 5-8)
b. Deductible rental expenses are not limited to gross rental income.
Rental expenses are not limited to gross rentals and may create a loss from the activity.
Deductions must be allocated between personal and rental use.
Mortgage interest and property taxes will be deductible currently, whether on Schedule A as an itemized deduction, or on Schedule E as a rental expense.
Vacation Home Rules
Module Check
- Which one of the following statements is correct as it applies to a vacation home with frequent personal use and frequent rentals?
a. Any excess deductions attributable to rental use may be carried forward and applied against future rental income.
b. The Tax Court method of allocation allocates mortgage interest and property taxes based upon a comparison of the number of days that the property is rented at fair value to the total number of days the property is used during the year.
c. Deductions allocable to rental use are not limited to gross income.
(LO 5-8)
a. Any excess deductions attributable to rental use may be carried forward and applied against future rental income.
Vacation Home Rules
Module Check
- Which of the following items may be deductible in the case of infrequent rentals (14 days or fewer per year) with frequent personal use?
a. depreciation
b. property taxes
c. maintenance
d. association dues
(LO 5-8)
b. property taxes
Only items otherwise allowable, such as property taxes and mortgage interest, are allowed as deductions with respect to infrequent rentals.
Depreciation is not deductible in the case of infrequent rentals with frequent personal use.
Maintenance is not deductible in the case of infrequent rentals with frequent personal use.
Association dues are not deductible in the case of infrequent rentals with frequent personal use.
Vacation Home Rules
Module Check
- If a vacation home is rented more than 14 days per year and the owner’s personal use does not exceed the greater of 14 days or 10% of the number of days rented,
a. all of the rental income must be included in gross income.
b. rental expenses are limited to gross income.
c. a pro rata portion of the rental income is included in gross income.
(LO 5-9)
a. all of the rental income must be included in gross income.
When a vacation home meets these requirements, all of the rental income is included in gross income. Since the residence test is not met, the activity is allowed to produce a loss.
In this scenario, rental expenses are not limited to gross income but may create a loss.
All of the rental income is included in gross income when the vacation home is frequently rented. Since the residence test is not met, the activity is allowed to produce a loss.
