When you bought your first home, it was certainly an exciting time. Since then you have perhaps sold it to buy another home. Time, improvements, and maybe even additions to your home enable you to build valuable equity in your real estate. However, there may also be years that you incur major expenses, which makes thoroughly reviewing your property tax deductions very important.
Properly itemizing deductions for your primary and secondary homes isn’t a quick or simple process. The rules that regulate your primary residence are different from those of your vacation home, and different even still if you own rental property. You need different forms, and the IRS places limitations on the amounts that you can deduct based on how you operate the property and whether or not you have the home for personal use. Let’s go through some scenarios to help you better understand how the process works. In the end, you should know better what to expect at tax time, how the calculation process works, and how to ask your accountant the right questions.
Property tax deductions on vacation homes
Taxpayers used to be able to deduct the entirety of their property taxes. However, beginning in 2018, the property tax deduction limit on both your primary home and vacation home was reduced to $10,000. There isn’t a marriage status restriction; although, if you file separately as a married couple, you can only deduct $5000 each on a single property. This deduction applies when the property is used only for personal use. If you also put your vacation home into service as a rental property during the year, then the IRS restricts how many days you can rent it before you have to report income.
You are allowed to rent your second home for up to 14 days or 10% of the year, without reporting earnings, whichever is greater. Whether you manage the rental yourself, use Airbnb, or hire a property manager, you must rent it at fair market value (FMV). Try to rent out your vacation home during peak holiday seasons to net a handsome return, which you can apply towards your property tax bill if it exceeds IRS limits, add to an emergency fund, or for making improvements.
Property tax deductions on rental homes
The IRS does not impose a property tax deduction limit on real estate used solely for your rental business. What this means for you is you can make line-item deductions for occupancy taxes, state taxes, fees, and operating licenses as well. You may also be able to deduct repairs and maintenance as operating expenses. Be sure to record your expenses separately from property additions and improvements. Upgrades that enable you to raise rates or rent out additional spaces are not property tax deductions.
When a tenant’s security deposit is applied towards making repairs, it should be reported as income. Mortgage insurance, property insurance, advertisements, and contracted services should all be tax-deductible operations expenses under Form 1040 Schedule E.
If you use your rental property as a part-time dwelling, IRS regulations require you to split out the portion of your expenses which are for personal from those that are for the rental. You need Schedule A Form 1040 to enter your percentage of use calculations. Improvements that your tenants make in lieu of a rent payment must be recorded as income. You should also record depreciation on Form 4562. One other thing to remember if you personally use your rental property when tenants are not occupying it is that the IRS places limits what you can record as expenses and losses.
Auditing and managing taxes
The key to successfully documenting and reporting your property tax deductions is organization. Whether you track your expenses daily, weekly, or monthly, be sure to categorize them and log your receipts or invoices properly. It may also be helpful to hire a tax auditor to review how you’re reporting real estate as a business or an individual. They can go over the details of your accounts with you to determine what you may be missing. A good tax accountant can help you to determine if you can benefit from an expense that will count towards an unused tax deduction. You may also be able to lower your tax bill with a 20% deduction on net profit on pass-through income. If and when the time comes to sell your vacation or rental home, having all your ducks in a row regarding the tax history of the property will be important.
Manage your taxes with a licensed professional
Filing your taxes can be complex, so it makes a lot of sense to have your rental and vacation property expenses and income reviewed by a tax professional. You may be missing out on valuable deductions. Even if you have expenses that have reached deduction limits for the current you, you may be able to carry forward expenses into the following tax year. SD Mayer specializes in helping families and businesses manage their tax liabilities. Make your vacation home work for you when you aren’t there. You may even gain higher net profits from your rental property following a thorough property tax deduction review.