Tax Effects of Buying and Renting a House

If a person owns a vacation/second home, they may deduct qualified mortgage interest paid with respect to the property.

 

Deducting Qualified Mortgage Interest on Second Home

If the second home is rented out, there might be additional tax benefits. Whether the owner must report rental income, and whether he or she can deduct expenses associated with renting it, depends on two factors. The factors are whether the owner uses the vacation/second home as a residence and the amount of time the owner rents out the property.

 

Deduct Qualified Mortgage Interest

An individual may deduct qualified mortgage interest paid with respect to a vacation or second home. Additional deductions may be available if the owner rents out the vacation/second home for a specified amount of time during the year instead of using it as a personal residence.  However, in that case, rental income may also need to be reported Partial deductions may be allowed for a residence that is converted to rental property.

 

What is minimal rental use?

A person might have a home, apartment, condominium, mobile home, boat, vacation home, or similar property used as a second/vacation home. The individual might use the vacation/second home entirely for personal purposes or might rent out the second home for part of the year. The proper tax treatment depends on whether the taxpayer uses the vacation/second home as a residence. Expenses associated with renting out the property may be deductible, while rental income may need to be included in income.

 

How time is minimal rental use?

If a person rents out a second/vacation home for part of the year, some tax issues depend on whether the property is a residence. Such issues include whether the person must report the rental income, and the extent to which he or she may claim expenses associated with rental of the property. Property is treated as a “residence” if the taxpayer uses it for personal purposes for more than the greater of:

  • 14 days; or
  • 10 percent of the number of the days during which the home was rented out.

 

Determining Personal Use of Rental Property

There is a formula for determining the number of days the property was used for personal purposes. The property is considered as being used by the owner when used by any of the following people:

  • The owner.
  • Any other person who has an interest in the property.
  • A member of the owner’s family if the family member does not pay fair rental value.
  • A family member of a person who has an interest in the property if the family member does not pay fair rental value.
  • Anyone under an arrangement that lets the owner use some other dwelling unit.
  • Anyone else who rents the property but pays less than fair rental value.

 

Property may also be used for personal purposes when:

  • Use of the property is donated to a charitable organization;
  • The organization sells the use of the unit at a fund-raising event; and
  • The “purchaser” uses the unit.