Owning a vacation home can bring joy and relaxation. It may also be a source of extra income. But any asset you own comes with tax considerations. Vacation homes are no exception.
For example, if you rent them out, the rental income is taxable. Yes, you can deduct certain expenses related to renting, like property management fees and maintenance costs, but you will still need to report it on your tax return. Understanding the distinctions between personal and rental use is crucial for property owners.
Personal use vs. rental use
The way you use your vacation home impacts taxes. If you rent it out for more than 14 days a year and use it personally for fewer than 14 days or 10% of rental days (whichever is greater), the IRS may consider it a rental property. If not, then it may be classified as a second residence. Tax implications vary between these classifications.
Tax implications
The tax implications for these two categories vary significantly. Here is a brief overview:
Second Residence
- Mortgage interest deductions: You can deduct mortgage interest within certain limits, similar to your primary residence.
- Property taxes: Property tax deductions are available.
- Rental income: Income generated from renting the property may be subject to taxation, but there are often exemptions for limited rental days.
Rental Property
- Rental income: All rental income is typically taxable, but you can also deduct various expenses related to the property.
- Depreciation: You can depreciate the property’s value over time, which can lead to significant tax benefits.
- Property management: There may be deductions for expenses related to property management, maintenance and repairs.
How you use your vacation home in Massachusetts determines whether it is classified as a second residence or a rental property, each with its own distinct tax consequences. Keep records, consult a tax professional and stay informed about tax laws to make the most out of your second home while staying on the right side of the tax code.