Renting the property
Typically, if you rent your vacation home for less than 14 days annually, you do not have to report any rental income and you are still entitled to deduct your real estate taxes and mortgage interest rates.

However, if you rent for more than 14 days, the income will need to be reported, and expenses associated with renting on Schedule E, Supplemental Income and Loss. Schedule E categories for deductions include maintenance, cleaning, repairs, advertising, management fees, insurance, mortgage interest, taxes, depreciation and utilities. If you utilize your second home for personal use and for renting, you need to prorate the expenses accordingly.

Keeping accurate records is very important. In addition, consulting with an accountant should also be considered to avoid making any tax mistakes. Also, check out the IRS Publication 527, Residential Rental Property.

Deduction for personal use
Use of your second home is considered personal when it is used as your home for more than 14 days out of the year. Or, 10% of the total days you rent the property. If the property is only utilized for personal purposes, and you don't rent it out, you are entitled to allowable expenses as itemized deductions on Schedule A. These expenses include real estate taxes, the total amount of mortgage interest, real estate taxes, and theft and casualty losses. Talking with an accountant will allow you to maximize your deductions. Also, check out IRS Publications 936, Home Mortgage Interest Deduction.

Deduction limits
Typically, the total of deductible rental expenses is dependant to the amount of generated rental income. Suppose, the mortgage interest, real estate taxes, and theft and casualty losses, as well as rental activity expenses (i.e. advertising, rental agency fees, etc.) create a rental loss, then other expenses such as operating expenses (i.e. utilities, repairs, pest control) and depreciation, would no longer be deductible. On the contrary, if you utilized a home equity loan on your primary residence to pay off the second home, this loan interest would be deductible on Schedule A and more of the rental expenses would be deductible on Schedule E. Get familiar with more equity loan tax benefits. There are also disadvantages to equity loans that need to be considered. Discussing this option with an accountant would be a wise decision.

Selling your vacation home
You will need to report capital gain or loss on Schedule D when you sell your home. The amount of depreciation you previously claimed will reduce the basis of the property accordingly.  Capital gain rates change regularly, so speak with your tax advisor. If you decide to sell your primary residence you are entitled to up to $500,000 in capital gains exclusion. If you then move into your second home and live there for two of the past five years, it is possible that you will be able to sell that property and take an additional $250,000 to $500,000 in capital gains tax free. For more information, check out IRS Publication 523, Selling your home.


*It is important to note that tax regulations and laws change on a regularly. Before selling or buying any type of property, be sure to get advice from your own legal or tax advisors for the most current regulations and laws. Learn more about taxes.

Related Reading:
Tax Deductions of Owning a Home