Question

Halle just acquired a vacation home. She plans on spending several months each year vacationing in the home and on renting the property for the rest of the year. She is projecting tax losses on the rental portion of the property for the year. She is not too concerned about the losses because she is confident she will be able to use the losses to offset her income from other sources. Is her confidence misplaced? Explain

Answer 1

Answer

In this case, Halle plan to live in the vacation home for several month in the year and plan to rent out the home for rest of the year. Since Halle will be staying several month in a year in the vacation home, the home can be identify as residence with significant rental use.

As Helle will be renting out the home for some part of the year, she will be allowed to deduct expenses directly related to renting the home like rent agent commission etc. In addition the proportionate mortgage interest and real property taxes that can be attributable to the rental use of the home.

In case of all the expenses for the rental use of home exceeds the gross rental income, Helle will be allowed to deduct the losses from the rental use of home. however any balances expenses allocated to the rental use of the home can be deducted to the extent of rental income after adjusting direct rental expense,rental mortgage interest and property taxes allocated to the property.

In this case Helle confidence to be able to offset the rental losses against her income from other sources is misplaced, because of limitation as explained above.