Divide Up Your Expenses Based On Rental and Personal Use
A big reason why scheduling your vacation home correctly is important is that it differs what type of expenses you’re able to divide up.
As a rental property, you can deduct real estate taxes, interest, insurance, utilities, housekeeping, household items (such as bedding, furniture, etc) and repairs.
For personal property, you can still deduct the mortgage interest and taxes, however, other business expenses won’t count if you didn’t rent it for more than 15 days.
Should I Make Renovations?
Making renovations can be a great call for your vacation home. Particularly if you’re planning to use it as a rental, fixing things up can not only help increase the value, and thus, the rental price, but also give you potential tax credits as well. Some popular choices include:
Historic Tax Credits
A good choice for those buying vacation homes in older cities or towns, historic tax credits give you up to 20 percent per dollar federally, with even more deductions on a state and even local level in certain instances. If you’re a first-time buyer of a vacation home and have the time or resources to invest in a historic property, the tax credits can help quite a bit to maximize the value of your rental.
Renewable Energy Credits
As noted by The Balance, there are three applicable percentages you can claim for renewable energy credits:
- 30 percent for property placed in service after December 31st 2016 and before January 1st, 2020
- 26 percent for property placed in service after December 31st 2019 and before January 1st 2021
- 22 percent for property placed in service after December 31st 2020 and before January 1st 2022
Especially those with residential properties generating passive income, installing energy-efficient and renewable sources helps quite a bit in both savings on the utility bill while also maximizing your profits on the unit. Look into saving a little bit towards installing renewable energy resources, as these can be a win-win on both tax savings and cost for maintaining a unit.
How Can I Maximize The Best Tax Situation?
Ultimately, the biggest question you need to ask yourself for a vacation unit is how often you’re going to use it versus how often you’re going to rent it.
There are a few different avenues to go down for the best tax situation. For example, if you’d like to maximize the 14-day rule for rentals, then perhaps having a home that can be used for weddings or other DIY events that charge per hour might be wise. Additionally, knowing that the property’s intent as a rental isn’t a bad route to go either, as maximizing expenses and other credits for it becomes much easier. Ultimately, a vacation rental purchase really boils down to what you want out of your vacations personally, as well as what you want to rent for others. And if you’re wondering how to get the best tax opportunity out of your situation, don’t hesitate to reach out at the email address below.