The seven day rule for vacation homeowners
Sorry, to all of my readers who sent correspondence about the Cape Coral millage rate issue. I have written several articles about this subject and have received many, many, many more responses. The only thing I will say other than what I have said in the past. Let your conscious be your guide, elections, letters, e-mails, etc. to the people you hold accountable??
Q: Continued from past columns concerning money in real estate.
Bottom line: If you think you will have a passive loss from renting out a vacation home and you’ll be able to deduct such a loss, keep personal use down to the level to where the home is classified as a rental property.
If you use the vacation for so many personal days that it is classified as a residence rather than a rental property, no losses can be deducted.
Seven Day Rule: Yet another rule comes into play for vacation homeowners.
In some areas, especially resorts, your average period for a vacation home may be less than seven days. If so, you face different requirements.
You divide the numbers by the days that you rented by the number of your paying customers.
If your vacation home averages less than seven days, you may be able to avoid the passive-loss rules and deduct your losses currently, in the year that you have the loss. To do so you must “materially participate” in the venture by either:
1. Devoting more than 500 hours per year to gaining reserves from the property.
2. Devoting more than 100 hours to this effort, as long as this is more than anyone else spends.
Strategy: If your vacation home rentals will average less than seven days and you expect to have net losses from this activity, consider not using a management company. By spending more than 100 hours per year yourself on this business, you will probably able to deduct their losses.
What if your vacation home usage qualifies you for the seven- day rule, but you do not materially participate in running the business? You’ll be subject to the passive-loss rules, without the opportunity of deducting up to $25,000 worth of net losses.
Disappearing deduction: As explained, it may make sense to restrict personal use of a vacation home to qualify it as rental property so that a loss can be deducted.
Trap: A home classified as a rental property is no longer as a residence. Mortgage interest payments allocable to your personal use won’t be deductible.
Example: You rent out your vacation home 190 days in a year and use it for 10days. Therefore, the property is considered rental property.
However, 5 percent of the usage (10 days out of a total of 200days) is allocable to your personal use. Consequently, 5 percent of the mortgage you pay is not deductible.
Reasoning: That 5 percent can’t be allocated to your rental activities because it is attributable to personal use. Yet the home does not qualify as a residence., so that so the 5 percent is not deductible home mortgage interesteither
Strategy: Crunch the numbers to see which will produce the best after-tax result-a deduction for mortgage home interest or a passive loss deduction Then adjust your personal use to have your vacation home fall into that category that works best for you, rental property or residence.
BEST: Talk with an accountant experienced in helping clients maximize the tax benefits of owning a second.
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor,
Century 21 Birchwood Realty, Inc.
4040 Del Prado Blvd., Cape Coral, FL
239-549-5724 Office 239-542-7760 Fax