When your vacation home is properly used as a business vacation home, the vacation home, or condo does not end up suffering from…
• the vacation-home rules,
• the passive-loss rules, or
• the entertainment-facility rules
Wow! Did you catch that? If not, go back and read it again, starting at “So here it is…”
Otherwise, keep reading.
Because this is one tip that can come in super handy now more than ever.
Why would I say that? Well, in today’s world we are all being challenged with COVID-19. You may have solid reasons to use your vacation home or condo for two purposes only:
• personal pleasure, and
• business lodging.
Now, let’s dive a bit deeper into this vacation home tip.
How Business Use Escapes the Dreaded Vacation-Home Rules
Do you use your business vacation home or condo solely for business lodging? If so, Great news!
When you use your vacation home or condo solely in this manner you escape the vacation-home rules and may deduct your business-lodging costs. The law is very clear on this. The vacation-home section of the tax law, Section 280A(f)(4), states that nothing in the vacation-home rules shall disallow any business deduction for business travel.
Example 1. You use your beach home for overnight business lodging 37 times during the year. You have no personal or rental use of the beach home. Your beach home is a business asset and deductible as such.
There are exceptions. Life is always full of exceptions especially when it comes to taxes.
So, one exception to this business-lodging rule. The law does not grant the business-lodging exception to landlords who rent dwelling units. If you have apartment buildings or other residential rentals, staying at your vacation home or condo to look after your rentals does not let you escape the unfavorable vacation-home rules.
Example 2. Fred uses his beach home for 70 nights of business lodging and 30 nights of personal lodging. He has a 70 percent business-use beach home and a 30 percent personal-use beach home.
Planning note. Fred has his home where he regularly works, in New Jersey. He travels to his South Carolina beach home location to conduct business in South Carolina. His business activity is what makes his overnight stays at the beach home officially business stays.
And as you can see, Fred gets to deduct the taxes because he also conducts business in South Carolina. Pretty nifty, eh?
But what happens when the personal vacation home you use also gets rented out the rest of the time?
How Rental Use Changes the Landscape
If you rent the vacation home or condo, you really change the tax picture. For example, if you use the vacation home or condo for personal, business, and rental purposes, you could trigger
• vacation-home rules that require a split between the rental- and personal-use deductions;
• vacation-home rules that classify the rental part of your property as either a personal residence or a rental property;
• loss of tax-favored hotel status for qualified rentals; and
• passive-loss rules that defer current tax benefits to future years.
Looking at this list, you might ask, “How can I avoid all these additional considerations and still rent out the vacation home or condo?” Answer: rent for 14 days or less. Technically, that works.
But how are you going to prove all of this up?
Build out your proof!
In addition to keeping receipts for the business condo’s expenses and improvements, you need to prove how many nights you slept in the vacation home or condo for both business and personal purposes.
Notations on your business and personal calendars are helpful but not conclusive. For your business activities, you want proof of why you had to be at the beach home.
And here is one case in point.
Example 3. Sara sells real estate at both her tax and beach home locations. She tracks her prospects and activities at each location.
Do as Sara does. Also, keep your eyes open for third-party and other corroborative evidence of use. Do you have emails, letters, and other proof of why you had to travel to the beach home? If so, print the emails and save them along with the written letters in your tax file.
Do you have evidence of being in the area, such as gas, grocery, and dining receipts?
Proving use of your business condo is easy and takes very little time. Documentation is essential. Don’t pass over this critical step.
And here is just one more part of this tip I’d like to share with you.
Do you own the vacation home or condo in your personal name?
If so, and you operate as a
• proprietorship or LLC taxed as a proprietorship, no problem. Simply treat the business percentage as business expenses on your Schedule C.
• corporation, submit an expense report to the corporation to obtain reimbursement. See TCJA Creates New Reasons for Accountable Plan Expense Reimbursements for how this works.
Why not use a rental arrangement with your corporation? Because you are an employee who likely uses the vacation home or condo for more than 14 days of personal use, you want to avoid a rental arrangement that could cost you your depreciation, repairs, and similar expenses.
The reimbursement method works and creates no complications. Why not use it?
If the corporation owns the vacation home or condo, you should reimburse the corporation for your personal use so as to avoid the monies showing on your W-2 and increasing your taxes.
This is just another tool in the tax planning toolbox that can help you effectively reduce their taxes. Making taxes work for you instead of you working for taxes means that we must look at tax strategies from every angle and every potential outcome.
By doing this you can effectively lower your tax bill. And who wouldn’t want to reduce their tax bill?
I hope this Tax Tip has been helpful. If you have any questions Contact a tax professional, as a real estate broker we can not give tax advice.