As an estate planning attorney I encounter people from time to time, who have included a vacation home, among their investments. Since most of us have limited vacation time during the year the owners of these residences often rent them out, when they are not using them. The rental income is taxable income, but the treatment of the expenses as tax deductions becomes complicated, when there is both rental and personal use of the property.
Certain expenses such as mortgage interest and property taxes may be deducted on any second home; however, other expenses such as insurance and repairs are only available, if a building is used to produce income. If an owner uses a vacation home for even one day of personal use, he or she is required to allocate these other business expenses between the time the dwelling is used by the owner and the time it is used to produce rental income and no deduction is allowed for the personal use period.
If a vacation home is considered a residence the taxpayer is also limited by a rule that his total deductions cannot exceed his rental income. A vacation home is considered a residence, if the taxpayer puts it to personal use for the greater of 14 days during the year or 10% of the number of days the unit is rented for.
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