If you’re converting your vacation home to a rental property, you’ll need to apply some elbow grease.
A second home doesn’t enjoy the same tax benefits that a rental home. In TC Memo 2015-95, the United States Tax Court denied Schedule E deductions because the owners didn’t take the necessary steps that would re-characterize a second residence as an investment property. Although they hired a broker to offer the home for rent, they were never able to secure a tenant. The court found that the deductions were inappropriate, as the owners spent too little energy trying to get the property sold. The mistake not only left them with the tax burden they would have had to pay anyway, but also with penalties, so it was a $33,000 mistake. (This mistake was probably especially painful as the choice not to use the home as a secondary residence was based on the death of the owners’ daughter.)
The lesson, as always, is consult with a professional when there’s reasonable doubt as to whether you need to send a little extra money to Uncle Sam. Wishful thinking can be costly.
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Rob Bodine is a Virginia attorney focusing his practice on real estate and intellectual property law. He’s currently Virginia counsel with First Class Title, Inc., a Maryland title insurance and settlement company. Rob is also a licensed title insurance agent in Florida, Maryland, Pennsylvania, and Virginia.