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We would like to buy a vacation home in the U.S. and would

We would like to buy...
We would like to buy a vacation home in the U.S. and would like to know if the interest payments will be tax deductible. We would use the house for one or two weekends per month and maybe one more week for ourselves. The rest of the time we would like to rent it out as much as possible since it is in an expensive location. We own another house that we live in. The real estate agent had hinted that there may be changes in the tax regulations coming, but advised us to talk to a tax specialist in this regard. We would therefore be very much interested in what your opinion about eventual/likely future law changes in regards XXXXX XXXXX deduction for vacation homes are.
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Answered in 48 minutes by:
12/2/2008
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,132
Experience: Taxes, Immigration, Labor Relations
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The mortgage interest is deductible for the primary and one secondary home.

There is no guarantee that the law would not be changed in the future. So far - I am not aware that this deduction will be taken away any time soon.

 

If you will use the property as rental - all expenses - including mortgage interest and depreciation will be deducted against rental income.

You would need to prorate rental use and personal use - probably according time the property is used for each purpose.

If you will have rental losses - they are generally deducted against your other taxable income - however there are some limitations on deductions.

 

Please let me know if you need any clarification or any details related to your situation.

 

 

 

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Customer reply replied 8 years ago
Thank you very much for your answer. Since I am not very familiar with the whole topic, I wanted to ask you to please clarify for me. For me it would be easiest if we used some real example figures.

* Monthly rent is $3000, house is rented out for 4 months per year
* Interest is $4000 per month, property tax $1000 per month
* Insurance, utility cost are $ 300 per month.

Which amounts are tax deductable? Could you please also explain what "depreciation " means and "rental losses" are?

As you will rent the property four months out of twelve - it will be considered 33% as rental and 67% as personal based on its use.

 

Property taxes are fully deductible - on the schedule A (assuming you itemize)

Mortgage interest is also deductible - 33% on the schedule E as rental expenses and 67% on the schedule A.

Insurance, utility cost - only 33% are deductible on the schedule E as rental expenses; other part would be considered as personal and is not deductible).

 

Rental income should be reported as income on the schedule E.

The 33% of the property cost should be depreciated and that will be expense.

 

Let me know if you links to forms.

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Customer reply replied 8 years ago
That clarified a lot for me. One last thing: how is the amount of the depreciation of the property calculated? I am just curious to understand if that amount will offset the rental income, so that net we don't have to assume that we need to pay taxes on the rent.

The residential rental property depreciated over 27.5 year period.

 

So assuming you paid for the property $500,000 and it is used as rental 33% of the time - the cost basis for depreciation will be $500,000*33%=$165,000

Every year you will deduct $165,000/27.5=$6000

 

However at the time you sell the property - depreciation should be recaptured and added to your taxable income.

 

You may need to become familiar with the IRS publication 527 - http://www.irs.gov/pub/irs-pdf/p527.pdf - please be aware that it is not updated for 2008 yet.

 

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,132
Experience: Taxes, Immigration, Labor Relations
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Customer reply replied 8 years ago
I just saw in the payment confirmation that you were credited only $15. I wanted to add another $15 and don't know what I did wrong (I am first time user). Do you know how I can correct the amount?

You are absolutely correct. Your payment and the bonus were applied as you wanted.

Appreciate that and your warm words.

Would be glad to help you with any other tax related issues in the future.

 

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Lev
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