Posted by admin | Posted in vacation rentals | Posted on 28-12-2010
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Vacation Home or declare it a Rental Home?
I am a young guy living in Washington DC and because of the housing prices I am forced to rent an apartment up here. Since I have a decent salary I really need a mortgage to write off, so I just purchased a home in Florida that I want to use as a “vacation” home. (Although this will be the only house I own, when purchasing it I had to classify it as a “second home” since I wasn’t going to be living in Florida full-time).
My question is this, my mother will be living in my vacation home and will be giving me monthly “gifts” to cover the expenses. The total of these “gifts” won’t exceed the $12,000 annual IRS cap. Since I’m not in the rental business, am I correct to assume that I don’t have to treat these gifts as “rent” and have to declare the income (hence file a 1040E)?
What are the pros and cons to keeping the house as a “vacation home” vs. a rental home? Would I be better off treaing this house as a rental instead?
By “1040E” I mean “1040 Schedule E”
If you are renting to your parent at less than the fair rental value of the property, the time your parent stays at the house is considered personal use time. If this applies, you do not have a rental property and you do not use Schedule E. You will not be able to take expenses in excess of the rent received.
In this case, your rent is reported on Line 21 of Form 1040 as other income. You will deduct your mortgage and real estate taxes on Schedule A as you would for a second home.
If the rent is more than the mortgage interest and taxes, you can deduct operating expenses of the home that you paid, such as insurance and utilities, on Schedule A as miscellaneous deductions subject to a 2% of AGI floor. Only if there are expenses left after that can you deduct depreciation, again on Schedule A.
If you were to charge market rent, then you do use Schedule E to figure your income and expenses. Although you could deduct the mortgage interest and property taxes on Schedule E, you can take a maximum loss of $25K per year only if your income is below $100K. The allowable loss vanishes when your income is above $150K.
Given that you will be spending time at the house as well, it does not appear to me to be a for-profit rental situation. Your option is to treat is as a not for profit rental or to forgo the payments from your mother and treat is as a second home.
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