When you have both rental and personal use of a home at the beach or in the city, you have what the tax law calls a vacation home.
That’s the beginning of the story.
In this article, you learn how the tax law treats a mixed-use vacation home that the law classifies as a personal residence.
In an upcoming article, you will learn how the tax law treats a mixed-use vacation home that the law classifies as a residential rental property.
The Tax Cuts and Jobs Act (TCJA) included two important changes that can negatively affect vacation homes treated as personal residences.
But there’s more. How you use your vacation property during the year can also affect your federal income tax results.
Here’s what you need to know, starting with the necessary background information.
Limits on Property Tax Deductions
Before the TCJA, you as an individual taxpayer could claim itemized deductions for an unlimited amount of personal state income and local property taxes. That was then. This is now.
For 2018-2025, the TCJA limits itemized deductions for personal state income and local property income taxes to a combined total of only $10,000, or $5,000 for those who use married filing separate status.
The state income and local property tax limits come into play when you have a vacation home that’s classified as a personal residence.
Limits on Qualified Residence Interest Expense Deductions
For 2018-2025, the TCJA also placed new limits on the amount of home mortgage debt for which you can claim itemized qualified residence interest deductions. Before the TCJA, you could deduct interest on up to $1 million of home acquisition indebtedness (meaning debt you incurred to buy or improve a first or second residence), or $500,000 if you used married filing separate status.
Before the TCJA, you could also deduct the interest on another $100,000 of home equity indebtedness, or $50,000 if you used married filing separate status.
So, before the TCJA, the debt limit for deductible home mortgage interest was really $1.1 million, or $550,000 if you used married filing separate status.
2018-2025 Rules for Deducting Interest on Home Acquisition Debt
For homes purchased during 2018-2025, the TCJA generally allows you to treat interest on up to $750,000 of home acquisition indebtedness incurred to buy or improve a first or second residence as deductible qualified residence interest. If you use married filing separate status, the debt limit is halved to $375,000.
Grandfather Rules for Home Acquisition Debt
Under one grandfather rule, the TCJA change does not affect interest deductions on up to $1 million of home acquisition indebtedness that you took ... Log in to view full article.
