The IRS considers your vacation home a business if your personal use does not exceed 14 days per year or 10% of the number of days the property is rented out at fair market value, whichever is longer. If your home qualifies as a business, you:
Must report all of your rents as income.
May deduct expenses attributable to the rental business, including mortgage interest, property taxes, utilities, repairs, advertising, insurance, property-management fees, and auto and other travel expenses.
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May depreciate the cost of the building over 27.5 years and the cost of appliances, carpets and furniture used in the rental property over shorter periods.
May deduct mortgage interest and property taxes attributable to personal use of the property.
May deduct, subject to income limitations, up to $25,000 in losses per year against other income, such as wages, if you actively participate in the management of the property. Active participation is defined as approving new tenants, deciding on rental terms, or approving capital improvements or repairs. The special loss allowance phases out when the taxpayer's adjusted gross income reaches $100,000 and disappears when it tops $150,000.
May defer capital-gains taxes when selling your vacation home by swapping it for another rental property through a "1031 exchange."
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