Residential Vacation Properties Tax Implications and Planning Susan Sterne Shareholder June 24, 2016 Residential Vacation Properties Tax Implications and.

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Presentation transcript:

Residential Vacation Properties Tax Implications and Planning Susan Sterne Shareholder June 24, 2016 Residential Vacation Properties Tax Implications and Planning Susan Sterne Shareholder June 24, 2016

Why Own A Vacation Property? ›Personal enjoyment ›Portfolio diversification ›Tax-efficiency

Basic Tax Consequences ›All second homes Deductible property taxes and mortgage interest (subject to limits and scale-backs) ›If rented out Even if cash flow is positive, taxable income may be zero due to depreciation deductions

Residence vs. Rental Property

The 14-day Rules ›No reportable rental if rental days are 14 or fewer in a year “Rosebowl rental” ›Not a residence if personal use days are 14 or fewer in a year: this only a rental ›Personal use > 14 days or 10% of days rented: this is a residence with rental use

ResidenceResidence ›Residence with rental: Allocate all expenses between personal and rental use Depreciation can be taken (and is allocated) Personal portion of mortgage interest and property taxes to Schedule A No deduction allowed for expenses in excess of income, but excess carries forward Excess deductions may eventually be lost

RentalRental ›Rental (14 or fewer personal days) Allocate all expenses between personal and rental use Depreciation can be taken (and is allocated) Personal mortgage interest cannot be deducted on Schedule A (it’s not a residence!) Net loss or income is passive loss or income

Rental: Passive Income ›Net passive loss can offset other passive income ›Net rental loss up to $25K / year might be deductible if: Actively participate in managing the property Gross income no more than $150K ›Real estate professionals that “materially participate” can deduct rental losses

Rental: Passive Income ›Otherwise, passive losses are suspended Carry forward until there is income Released when property is sold ›At least you do get to use them eventually! Year of sale of a passive activity can be a great tax year due to tax rate shift! ›But is it really a rental? More on this later…

Selling a Rental Property ›Sec 1031 exchange ›Convert to primary residence first to exclude gain under IRC 121? Use as primary residence for at least 2 of 5 years preceding sale BUT – years of “non-qualified use” limit amount of exclusion available −Use as a rental is a “non-qualified use”

Rental or Business? ›Short-term rentals (less than 8 days) Not a “rental activity” Not eligible for deduction up to $25K Can’t be grouped with other rentals to qualify as a “materially participating real estate professional” ›“Substantial services” Might be a business subject to self-employment taxes

Taxes Other than Income Tax ›Oregon Lodging Tax 1% increasing to 1.8% in a week! (July 1) ›City of Portland / Multnomah County Not required if gross receipts < $50,000 Rules relating to rental units are complex, and differ for City and County ›Washington State Sales/lodging taxes – rates vary by location Generally not subject to B&O Tax

Perkins & Co perkinsaccounting.com perkinsaccounting.com PerkinsCo LinkedIn/perkins & coQuestions?Questions? Susan Sterne

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