By KEVIN POST Press of A.C. Business Editor | Sunday, March 28, 2010
A rent sign is planted in front of an Ocean City home on Asbury Avenue. Renting out a second home can be problematic when tax time rolls around.
Second homes offer tax opportunities to their owners but pose risks and challenges, experts say, especially at the shore in southern New Jersey.
Much depends on whether the home is rented out and, if so, how that rental use compares to personal use of the home.
Joe Mento, who has been helping second-home owners with their taxes for more than 50 years at Cape Bookkeeping & Tax Center in Cape May, said renting the home for more than 14 days a year triggers an Internal Revenue Service requirement to declare the income on Schedule E.
“If you’re renting the home out on a part-time basis, that’s a hot spot with the IRS,” Mento said. “Some people rent it and don’t report the income, but they should be aware the IRS is scrutinizing that more carefully.”
The biggest single deduction second-home owners can take — mortgage interest payments — also comes with a catch not known to some owners, he said.
“The total mortgage amount allowed on both the primary residence and the second home is $1 million,” Mento said, “which in this area is not that hard to get past.”
Tom Morrissey, a certified public accountant in the Forked River section of Lacey Township, said those who rent their second home out all year long can generally write off all the expenses related to it.
But if their personal use of the home exceeds the greater of 14 days or 10 percent of the days rented, then the allocation of expenses becomes more complex, with the direct and indirect expenses listed separately.
“That’s why people keep track of their personal time,” Morrissey said. “If they exceed the limit, then they must file Schedules A and E, and generally they don’t allow a loss for mixed use.”
“People are pretty conscious of how much personal use they have vs. renting because they want to write it all off,” he said.
That’s especially true at the shore compared to other second-home locations such as the Poconos in Pennsylvania, he said.
“I have clients elsewhere and they’ll use the home and they’re not as concerned about it, probably because the operating costs are so much less away from the Jersey Shore,” Morrissey said.
When figuring personal use, he said, not only use by the owner/taxpayer counts, but also by family members and anyone who has an interest in the property.
The exception is if a family member uses the house as his or her primary residence and a fair rental value is paid to do so, he said.
Rules governing tax treatment of second homes have gotten tighter over the years, said Christine Karpinski, author of “How to Rent Vacation Properties by Owner.”
“There are some pretty strict guidelines with regard to second homes because back in the 1980s a lot of people bought them and used them as tax shelters,” Karpinski said.
If you have proof, though, there are “a lot of really good deductions you can take,” she said.
One many aren’t aware of is travel expenses for trips to theproperty to work on it, she said. Another are the expenses for a home office used to run your vacation rental business.
“I recommend that owners sign their own guestbook and keep a record of what they’ve done in the guestbook,” Karpinski said. “First, it tells the renters that you are active and the things you’ve done. Then, for tax purposes, besides receipts, you have signed the book between renters proving you were there.”
She suggests considering many other possible deductions:
- property taxes;
- property, flood and liability insurance;
- utility bills (including TV and Internet);
- housekeeping expenses;
- and even meals while on maintenance trips to the house.
Bigger expenses such as improvements, furnishings and equipment needed may be amortized or depreciated, she said.
All of this may be a bit too challenging for some second-home owners.
“I think some can handle the tax return themselves, but you’re always advised to get professional help,” Mento said.