slide 5-1 tax treatment of vacation and second homes chapter 5
TRANSCRIPT
Slide 5-2
Vacation home Investment property 14-day rental rule Passive activity Active participation
Tax Terminology
Do not to give legal or tax advice. Advise clients and customers to seek professional advice.
Material participation Cost recovery,
depreciation 1031 exchange Real estate
professional (IRS definition)
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14-Day Rental Rule Under 14 days a year
Don’t have to report or pay tax on income
No tax deductions More than 14 days or 10% of time
rented all income is taxable Deductions offset rent-related portion
of expenses
If rented year round, the IRS will regard it as a rental property
If not rented or owner-occupied, the IRS calls it an investment property
A Tax-Free Windfall?
Determination is per property, not per owner. All co-owners’ use counts toward limit.
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Deductible Expenses
Personal Residence
Interest on mortgage debt, points, and fees
Real estate taxes
Casualty and theft losses
Rental Property
Interest on mortgage debt, points, and fees
Real estate taxes
Casualty and theft losses
Depreciation Advertising
Cleaning, repairs, and maintenance
InsuranceCommissionsTax preparation fees
Travel and local transportation expenses ?
Slide 5-5
Modified Accelerated Cost Recovery System (MACRS)
27.5 year depreciation period
Cost RecoveryRecovery of the cost of the property and
improvements over time
Structures only, land is never depreciable
Deductions are recaptured on sale and taxed at 25%
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Converting to Personal Use
About 1 in 3 properties converted
Loss of expenses deductions
2 year residency reclassifies property as a personal residence, eligible for $250K/$500K exclusion of gain
Deductible portion of gain prorated between personal and rental/investment use
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Owners can mail letters to themselves and their accountants stating the desire to switch the use of the property.
Document the Repurposing
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Capital Gain Tax on Sale of a Converted Home
Effective 1/01/09
Sale of a primary residence used as a 2nd home (non qualified use) after 1/01/09 cannot claim full $250K/$500K gain exclusion
Taxable portions of gain based on % of non qualified use
Slide 5-9
Example
Gain XNon qualified use
= Taxable GainEntire period of ownership
after 1/01/09
Ownership or use prior to 1/01/09 does not figure in calculation
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