One of the biggest and best tax breaks in the law is the home sale exclusion. If you have owned and used the home as your principal residence for two out of the last five years, you can exclude tax
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Special Tax Break for Vacation Homes You can rent out your vacation home (or principal residence) for no more than 14 days and get a special tax break. Any rental income you collect is tax-free. You don't have to report it on your tax return.
If you take advantage of the 14-day rule, you can deduct mortgage interest and property taxes for your vacation place. But you aren't eligible for additional deductions for rental related expenses.
This tax break is put to use by owners with property near a major event, such as a golf tournament. |
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The Tax View on Timeshares If you enjoy vacationing in a resort area, you may have acquired a timeshare unit there. Typically, ownership allows you to spend a week or two in the same place each year.
What are the tax consequences? The timeshare rules are similar to owning a second home or vacation home. You can deduct mortgage interest and property taxes that are attributable to the timeshare - even if it isn't financed through a conventional mortgage.
Let's say you rent out the place because you can't get away. You can deduct rental expenses to offset your rental income. What if you arrange to swap your timeshare for another timeshare? The swap is treated as a "like-kind exchange" of properties, so there's no current tax due on the transaction (unless you receive extra compensation in the deal).
What happens if you sell your timeshare ownership rights? Any profit you receive from the transaction is taxable. Any loss is generally treated as a nondeductible personal loss. (However, donating the rights to charity can result in a deduction.)
Caution: The tax rules for timeshares can differ based on your use. Consult with your tax pro. |
on the first $250,000 of your gain if you are single ($500,000 if you're married and file jointly). Depending on your situation, you might be able to pull down as much as a half million dollars tax-free!
Unfortunately, there is no comparable tax break for vacation homes or second homes. If you sell a vacation home at a sizeable profit, the entire gain is taxable at capital gain rates.
There are two possible ways out of this tax predicament:
1. Convert your vacation home into your principal residence. After you sell your main home, move to the vacation home for a minimum of two years. Then you can sell the home - which is now your principal residence - and pocket up to $250,000 tax free if you're single (or $500,000 if you're married and file jointly).
There's no law against claiming the home sale exclusion multiple times.
2. Convert your home into a rental property. Then you can exchange the home for another "like-kind" investment property without any current tax. Keep in mind that the tax law has a liberal view of what constitutes "like-kind" property.
In other words, you don't have to swap a vacation home for another vacation home. You might even receive a commercial property such as a warehouse or raw land in exchange. Note: You must pay tax on any "boot" you receive as part of the deal, including a reduction of mortgage liability.
Be careful: If you continue to use the vacation home personally, it will not qualify as investment property that can be exchanged for another like-kind property.
Furthermore, there are other technical requirements for like-kind exchanges, including the imposition of strict time limits. Consult with your tax professional for more information.
(For more information on vacation homes, click here to read our previous article "Follow the Rules to Collect Valuable Tax Breaks.")
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