Understanding tax rules for vacation homes is no walk on the beach. Under the Tax Cuts and Jobs Act (TCJA), the laws became a bit more complicated. Though the new rules have been in place for a while, vacation homeowners still have questions about them.
Before the TCJA, vacation homeowners could claim itemized deductions on an unlimited amount of personal state and local property taxes. The TCJA now limits itemized deductions for these taxes to a total of $10,000, or $5,000 for married couples filing separately (MFS).
In addition, the TCJA imposed new limits on mortgage interest deductions. Through 2025, the deduction for mortgage interest home acquisition debt incurred after December 15, 2017 is limited to underlying debt of $750,000, or $375,000 for MFS. (Note that pre-TCJA limits still apply on certain refinances. Ask your tax advisor for details on this and other nuances of the tax law changes.)
The TCJA also eliminated deducting home equity debt. Prior law allowed homeowners to treat interest on up to $100,000 of home equity debt as deductible qualified residence interest. Note that IRS debt definitions may allow a home equity line of credit to qualify as home acquisition debt in some cases.
IRC Section 280A details vacation home income based on the number of rental days versus personal use days for tax purposes. If the home is rented 14 days or fewer, it is considered personal-use property. If the home is rented 15 days or more, it is considered rental property. If the home is used personally more than 14 days or 10 percent of the total days the home was rented, your expenses are limited to the rental income, with no loss allowed.