Tax Tips for the Homeowner and Vacation Home Rentals
Tax Tips for the Homeowner and Vacation Home Rentals
This week we’ll talk about some tax tips for the homebuyer. If you’re a first-time homebuyer, or if you haven’t owned a home in the past two years, maybe buying a house, taking out a mortgage, and moving are at the forefront of your mind. If you have owned a home for more than a year, you already know the tax benefits of owning a home. Here are some of the different types of deductions available on your federal tax return because you own a home:
- Mortgage Interest – a mortgage cannot exceed the value of the home. If so, then the excess mortgage is considered Investment Interest. And mortgage interest deduction is only available up to certain dollar limits. This year, (2018) Home Equity Lines of Credit (HELOC) and second mortgages are only deductible if the debt is acquisition debt. This means you CAN’T use a mortgage to buy a car, pay off credit cards, or any other reason. You can only take out a mortgage to buy the home or add to the home. If you do, the interest may not be deductible, except as Investment Interest. So, if you have a HELOC, second mortgage, or other types of real estate secured loan, be sure you can prove what the money was used for when you took out the loan!
- Prepaid mortgage interest – on the original purchase and any refinance of the property depending on the date of the month you close.
- Points or Origination Fees – deductible for points paid upfront or at closing, either by you or the seller.
- Real Estate Taxes – current or prepaid real estate taxes are deductible, up to certain limits.
- Mortgage Insurance Premiums – sometimes these are known as MIP or PMI.
- Capital Gains Exclusion – on profits of the sale of personal residence up to $250,000 for single and $500,000 for a married couple, but you must live in the home two (2) of five (5) years, with a few exceptions for military service, change in employment, medical reasons, or other unforeseen circumstances.
Vacation Home Rentals
If you rent a home to others, you usually must report the rental income on your tax return. But you may not have to report the income if the rental period is short and you also use the property as your home. In most cases, you can deduct the costs of renting your property. However, your deduction may be limited if you also use the property as your home. Here is some basic tax information that you should know if you rent out a vacation home:
- Vacation Home. A vacation home can be a house, apartment, condominium, mobile home, boat, or similar property.
- Schedule E. You usually report the rental income and rental expenses on Schedule E, Supplemental Income and Loss.
- Used as a Home. If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
- Divide Expenses. If you personally use your property and rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure out how to divide your costs, you must compare the number of days for each type of use with the total days of use.
- Personal Use. Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.
- Schedule A. Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes, and casualty losses.
- Rented Less than 15 Days. If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.
Also remember to keep receipts and purchase documents, when buying, improving, or refinancing a home, for as long as you own the home. The expenses, or costs, prove your basis (what you paid) for the property. This will reduce or eliminate any taxes owed on profits made when you sell the house. Keep these purchase or home improvement receipts in a safe place, so you will have them to show your accountant and possibly the IRS.
Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.
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Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.