Q. We are interested in a vacation home but not sure about renting it yet. How is rental income handled in the new tax bill?
A. There’s a lot to think about when you’re considering a vacation home.
Start by deciding the main purpose of the new home.
“If you are purchasing the home as an investment property, you should have low expectations of leisure usage time,” said Peter O’Neill, a certified financial planner with Beacon Trust in Morristown. “If you are purchasing the home as a leisure property, you should have low expectations of rental income.”
O’Neill said it’s possible to find that happy medium, but it can be difficult sometimes.
Your decision is especially important when it comes to the taxation of rental income.
There are differences in how 2017 and 2018 tax law affects second and vacation homes.
First, in 2018, mortgage interest can be deducted on up to $750,000 in mortgage debt, down from the $1 million limit in 2017, O’Neill said, noting the $1 million limit is grandfathered in for those who purchased their primary residence before Dec. 15, 2017.
“The $750,000 limit now in effect is in aggregate, meaning if you take out a $500,000 mortgage on a primary residence, you would only be able to deduct interest on an additional $250,000 in mortgage debt for a second home,” he said. “There is also a $10,000 cap on deductions for state, local, and property taxes.”
O’Neill said one of the best deals going from the IRS is the ability to allow vacation home owners to rent their home for up to two weeks and not report any of the rental income received, as long as you occupy the home for at least 14 days.
Under this scenario, you will not be able to deduct any rental expenses.
Then once you reach 15 days of rentals, you must include all of your rental income and rental expenses on Schedule E when you file your income tax return, he said.
One of the benefits of owning a rental property is that you continue to have the ability to offset rental income with expenses associated with running and operating the property. These expenses can include mortgage interest, repairs, and maintenance, O’Neill said.
“If you plan to use the home as mostly an investment property, you may want to look into setting up either a partnership or LLC,” O’Neill said. “Pass-through entities received a substantial tax decrease in the new bill, which could result in a new 20 percent deduction for the rental income.”
But because everyone’s tax situation is unique, you should enlist a qualified tax professional to help quantify your specific tax implications.
Email your questions to moc.p1545138351leHye1545138351noMJN1545138351@ksA1545138351.