Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Complex tax rules affect 2nd home buy

- by Alan Duvall 

Published in Dayton Daily News  May 20, 2007 

“Our house is a very, very fine house.”  CSNY 

Owning a second home is no longer a haven reserved for the wealthy.  Purportedly, an estimated one-third of all houses purchased are second homes by individuals averaging only $70,000 annual income.   

Many owners buy with idealistic intentions to help finance purchases through third party rentals and tax deductions.  Unfortunately, they are often discouraged by layers of complex tax rules which limit precious deductions. 

The initial layer reduces deductions by formula based upon the percentage of personal to business usage.  Expenses so allocated to personal use are generally non-deductible, except for itemized real estate taxes and interest.  

If the real estate is rented less than 15 days in a year, no rental income or deductions are reportable.  At the other extreme, if an owner personally uses the vacation home for more than 14 days or 10% actual rental days – allocable business deductions cannot exceed rental income.   

In Middle Earth, if the home is rented more than 14 days and personal use is less than 15 days – rental income is taxed and offsetting deductions are allowable per calculations based upon the percentage of business to personal use.  Only in this time usage scenario are deductible rental losses possible. 

However, since most real estate rentals are deemed “passive” by nature, another complex hurdle must be cleared to achieve deductible loss status.     

If designated owner participation requirements are met and taxpayer’s adjusted gross income (AGI) is less than $100,000, a maximum $25,000 rental loss may be deducted each year. 

Annual deductible rental losses are systematically reduced for taxpayers with AGI’s greater than $100,000, to the point where no annual losses are deductible for taxpayers with AGI’s greater than $150,000.  

Accumulated losses limited by the passive rental rules reside in tax purgatory and emerge to either reduce future year rental income or become totally deductible when the associated rental unit is eventually sold.

“I count my loss and just walk away, who sold out now?”  The Who 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.  Previous articles archived at www.duvallcpa.com.