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We are considering purchasing a rental property in Cape. My…

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We are considering purchasing...

We are considering purchasing a rental property in Cape Cod. My understanding to get the full tax advantage I am only allowed to stay in the property for 14 days. Is this the case even when the rental season in May to Sept each year? What if we stayed off season?

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Submitted: 10 months ago.Category: Tax
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9/20/2017
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 10 months ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,872
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi - No, the 14 days rule simply is the time that AFTER WHICH, you DO have a rental. Said differently, if personal days exceed 14 days or 10% of the number of days the home is rented (whichever is greater), the IRS considers the property a personal residence and rental loss cannot be deducted. (meaning you can take a loss over and ABOVE the rental expenses.

...

Rental expenses, up to the level of rental income, as well as property taxes and mortgage interest, can still be deducted.

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So this really comes down to the specific numbers for your property. If your mortgage interest, depreciation, repair and maintenance, advertising, etc. are just about enough to offset income, using the property still makes sense.

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There's another piece to this as well. You can only deduct passive losses against passive income anyway. (rents are passive income and rental expenses are passive losses. (There IS, however, one exception)

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Property owners with modified adjusted gross incomes of $100,000 or less may deduct up to $25,000 in rental real estate losses per year if they "actively participate" in the rental activity. (again meaning over and above the expenses that take the rental income down to zero)

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You actively participate if you are involved in meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property. This allowance is phased out for taxpayers whose MAGI exceeds $100,000 and eliminated entirely when it exceeds $150,000.

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So, depending on your income level, the ability to deduct more than the rental income may or may not be valuable.

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One final piece to this. The losses that CAN'T be deducted are "suspended," and are released to be used when the property is sold (against any gain on sale and any other taxable income for the year of sale)

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 10 months ago

Sorry for the typo in the first paragraph above (site's not letting me edit for some reason).

...

( meaning you canNOT take a loss over and ABOVE the rental expenses) ... [when you use for more than 14 days]

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 10 months ago

SO, to recap, it's the losses OVER and ABove the rental income (losses that would reduce other taxable income, say wages, on your tax return) that must be suspended and not used if you are over 14 days of personal use.

...

Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

I hope that you’ll rate me based on my accuracy and thoroughness, rather than any good news/bad news content.

That’s the only way JustAnswer.com will compensate me for the work here.

Thanks,

Lane

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice 1986.

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