Tax implications and planning for residential vacation properties

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

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

3. 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

4. Residence vs.
Rental Property

5. 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

6. Residence
› 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

7. Rental
› 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

8. 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

9. 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…

10. 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”

11. 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

12. 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

13. Perkins & Co perkinsaccounting.com
503.221.0336
@PerkinsCo
PerkinsCo
LinkedIn/perkins & co
Questions?
Susan Sterne
ssterne@perkinsaccounting.com
503.221.7531