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The Orlando Sentinel
Date: Sunday, February 11, 2001 Section: HOMES
Edition: METRO Page: J13
Source: Robert Bruss, Tribune Media Services
Column: Realty Tax Tips
REALIZE SAVINGS FROM 2ND HOME
TAKE A TIP FROM MILLIONS OF SNOWBIRDS: KEEP ACCURATE RECORDS ON YOUR VACATION GETAWAY OR RENTAL HOUSE AND YOU'LL COME OUT AHEAD WHEN TAX TIME ROLLS AROUND.
If you own a vacation or second home, or are thinking about buying one, consider the income-tax savings during ownership and when you sell it. Depending on your personal situation, you might be able to claim substantial tax deductions during ownership. When you decide to sell, you could possibly make a completely tax-free sale.
The key to maximizing your tax savings from a vacation or second home is keeping careful tax records, just in case the Internal Revenue Service audits your tax returns. If you document your entitlements, you'll save thousands of tax dollars. Without good records, especially regarding personal occupancy time, you could forfeit your vacation or second-home, tax breaks and incur a negligence penalty.
Millions of snowbirds spend a major portion of each year living in their warm-climate second home, typically in Florida, Arizona, Hawaii or California, and then return to their other residence for the rest of the year.
Depending on the amount of time spent at each home, one or both might qualify for up to $250,000 home-sale tax-free profits if you should decide to sell. If you're married and both spouses meet the occupancy test, then up to $500,000 home-sale profits can be tax-free.
To qualify, Internal Revenue Code 121 requires ownership and occupancy of your "main home" an "aggregate" two years during the five years before the sale. Only one spouse need hold the title. But if both spouses claim "the $250,000 exemptions, then both spouses must meet this occupancy test.
For example, suppose you live full time in your Florida home from November to April annually, but you move to your other home, full time, from May through October each year. If you decide to sell either of these residences, both meet the aggregate two-year occupancy test. However, this tax break can be used only once every 24 months, with limited exceptions for job-location changes and health-related moves.
While not conclusive, evidence of "main home" occupancy include things as utility bills, voter and automobile registration, business or retirement income, and tax return filings while you are living there,
Although secondary residences usually aren't great tax shelters during ownership, they often can provide significant tax savings for homeowners. Here are four possible situations that may mean savings.
NO PERSONAL USE TIME
If you never occupy your vacation or second home, except for minimal cleaning and repair time, and it is rented or available for rent the entire year, all the rental income and applicable expenses must be reported on Schedule E of your income tax returns.
Mortgage interest, property taxes, insurance premiums, utilities, repairs and depreciation can all be subtracted from rental income that is received.
You will probably have a tax loss if your second home falls in this category. But you must "materially participate" in managing your property. You also must earn less than $100,000 adjusted gross income in 2000 if you are to claim up to $25,000 "passive activity" loss from your rental property against other ordinary, taxable income. However, if you're a qualified real estate professional, such as a real estate broker, there's no limit to your deductions in this rental property classification.
MINIMAL OR NO RENTAL TIME
If you rent your vacation or second home to paying guests fewer than 14 days per year (regardless of the amount of rent received), that rent need not be reported on your income tax returns. But you can fully deduct your mortgage interest, property taxes and any uninsured casualty loss (such as rain or snow damage) as itemized deductions on Schedule A of your income tax returns.
ANNUAL PERSONAL USE OF MORE THAN 15 DAYS
If you or your relatives use your vacation or second home more than 15 days or 10 percent of the rental days, if rented more than 14 days per year, you cannot deduct any loss from the property on your income tax returns. But mortgage interest and property taxes are always tax deductible.
For example, if you rented your ski cabin to tenants for 90 days in 2000, and personally used it for 20 days, then you fall into this category.
Schedule E is the place to report the rental income received and the applicable expenses. The correct order for deducting expenses is mortgage interest, property taxes, uninsured casualty losses, operating expenses and depreciation. If mortgage interest, property taxes and uninsured casualty losses exceed the rent received, the excess expenses should be deducted as itemized deductions on Schedule A.
ANNUAL PERSONAL USE OF FEWER THAN 15 DAYS
If your personal use is fewer than 15 days a year or less than 10 percent of the rental days that exceed 14 days annually, there's no limit to your loss deductions (except for the $25,000 annual passive activity loss limit explained earlier).
For example, suppose you rented your summer home to tenants for 120 days last year and personally used it only 10 days. Then you are in this category. However, the Internal Revenue Service says the profit motive of Internal Revenue Code 183 applies, requiring a profit at least three out of every five years of your rental activities.
Vacation and second homes are not great tax shelters during ownership. But they can provide modest tax savings during ownership while the property appreciates in market value. However, if you meet the "aggregate" ownership and occupancy tests for two out of the five years before sale, your sale can be tax-free up to $250,000 per qualified home seller. Please consult your tax adviser for complete details.
Memo: Robert Bruss is a consumer real estate columnist based in San Francisco. His comments reflect a national perspective. Readers should investigate local conditions.
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