What can we write off on our vacation/rental condo?

Q: We bought a vacation/rental condo at the end of last year. What can we write off and how should this property be setup to gain tax advantages? Our AGI is over the limit. --Nancy

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: You have wandered into the Vacation Home Rules Area of Tax Law. From your question, it cannot be determined if this will solely be a rental property or partially rented and partially used for you own vacations (I suspect that the second circumstance applies). If it is solely a rental property, you would report it on Schedule E, depreciate the condo cost over 27.5 years using straight line depreciation (unless it is outside of the U.S., in which case it is depreciated over 40 years), on a mid-month convention. All expenses would be claimed against the rent income. If you are active in managing the property, you may claim losses of as much as $ 25,000/yr., provided your Adjusted Gross Income is under $ 100,000, before taking the rental activity into account. Prepare Form 8582 to calculate the allowable loss.

If you use it for YOUR vacations, as well as renting it out, the rules are more complex. If you rent for no more than 14 days, do not report the rents and claim mortgage interest (as a second home) and real estate taxes on your Schedule A. If you use it personally for no more than 14 days (or, if longer, 10% of the number of days that the property has been rented for the year), then report the rents and claim 100% of the expenses on Schedule E. If you rent it for more than 14 days AND use it more than the allowed period (14 days or 10%, as described, above), you must allocate the expenses, including depreciation, based on the rental days vs. the personal use days. The IRS has a publication that gives you the details and worksheets that can be down loaded from their web site (irs.gov) that goes into detail regarding the rental rules for vacation property - Publication 527.