If you use your home as a vacation rental and personal use, you have a tax-code-defined vacation home. This basically means you use your home for personal and business use. The rules are simple if you use it for one or the other. But when you combine uses, your tax situation gets more complicated.
Here’s what to consider.
- If you use the home strictly as a primary residence, it’s straightforward. You can exclude the first $250,000 (single filers) or $500,000 (married filing jointly filers) from your capital gains, lowering your tax liability.
- If you use the home as a vacation home/second home but don’t rent it out, you pay capital gains on all profits. There’s no exclusion, and you may also pay net investment income tax.
- If you use the home as a rental, you pay the same capital gains and NIIT. But you may also face Section 1250 gain taxes, and passive activity suspended losses.
Turning a rental into a primary residence may have different rules depending on how long you owned it as a rental versus a primary home.
The rules are complex. Contact me today if you’d like help figuring out your tax situation on your vacation home.