Tax Deductions for Vacation Homes

July 22, 2023

Tax Deductions for Vacation Homes
 
San Francisco is a quintessential vacation spot. People come from all over the world to hike up the steep hills for sweeping views of the Golden Gate Bridge, catch a San Francisco Giants game, enjoy a performance by the San Francisco Ballet, and take the kids to the San Francisco Zoo. For such a small city on a geographical scale, San Francisco is brimming with culture, life, and an eclectic mix of attractions.

So much wonder and excitement makes the city ideal for a vacation home, which provides ripe opportunities for tax deductions. Explore what tax deductions your vacation home may be eligible for.

Is your home a vacation home?

The first thing you must figure out when considering your tax deductions is whether your home is a vacation home. A vacation home is what it sounds like. It is a secondary dwelling in which the owner enjoys recreational activities. It is distinct from the primary dwelling, which is the home where the owner spends the majority of the year, often where the homeowner works, and where any children might go to school.

In general, you could say a primary dwelling is where the owner lives, and a vacation home is in a different city where the owner takes vacations. A vacation home can take many forms, including a single-family house, a condominium, a townhouse, a cottage, or even a trailer.

Sometimes, confusion arises around vacation homes and their designation when an owner spends a significant amount of time in the vacation home. For financial purposes, like tax deductions, it is important to be able to separate the two into a primary residence and a vacation home. It often helps to decide which is which by looking into the tax breaks afforded to each.

Tax deductions for rental owners

One benefit to having a vacation home is that you can use it as an investment property as well as your vacation home. Many owners of vacation homes rent out the property when they are not using it, charging a fee that then becomes passive income. Rental owners can then take a few tax deductions on their vacation homes they would not otherwise be able to take.

Mortgage interest is standard for any property you own. You can typically write off the interest you pay on the mortgage of your vacation home. Property taxes are another common tax write-off for any home you own. No difference exists here between calling your vacation home a vacation home or a rental property. However, once you designate the property as a rental property and report income from that rental, you can now use this property as a business, which means you can also write off home improvements. Any money you spend to make the home nicer for your renters is considered a business expense and can thus be written off as a tax deduction.

You can make improvements on your vacation home that benefit you and get a tax deduction for it as long as you also rent the property to others when you are not in it. Essentially, every dollar you spend toward keeping the home in good condition for renters is a business expense and a tax deduction. You can also write off depreciation if, for any reason, the value of the home goes down, which is unlikely in San Francisco but still worth noting. Finally, you can write off marketing and advertising materials or any money you spend trying to attract new renters to the property, including expenses like professional photography or staging.

Remember that you must use the home as a rental with reported rental income, as you cannot simply write off improvements to your vacation home. In the same way, you cannot write off improvements and expenses for your primary residence.

Mixed use of a vacation home

It is also helpful to note that you can use your vacation home for many uses. First, homeowners may stay in their vacation homes for up to six months each year. Longer than that would make it the majority of the year, making the home a primary residence. Second, you can rent the home out as a source of income, making extra money and deducting vacation home expenses. Third, you can actually rent the house to yourself for business purposes for up to 14 days. This last one means that you can not only write off the expense of the home, but you can also write off the money you spend to rent your own home. Don’t try to use this as a way to overstep the IRS, though. If you report the rental income and deductions for the rental business, then verified renters must be in the home for 10% of the year.

In the end, buying a vacation home as an investment property can be a smart move, especially in an area like San Francisco, where property values are only rising. It’s all about understanding the tax laws and working with both a great realtor and a reputable tax accountant.

Pacific Edge Real Estate will help you with your vacation home

Pacific Edge Real Estate is your go-to for San Francisco real estate, whether your primary residence or a vacation home. We are experts in both our field and our community, and can help you find homes for sale in Noe Valley and beyond. Contact us today and let’s get started.

*Header photo courtesy of Pacific Edge Real Estate

 


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