We all know you can have tax-code-defined vacation homes in the city, the suburbs, and recreation areas.
Your tax life can get more complicated when you have both rental and personal use of the home; because you have entered the tax code’s vacation home section. In this situation, the property is one of the following:
- Principal residence
- Second-home
- Rental property
If a home is considered a principal residence, the $250,000/$500,000 home sale exclusion applies.
If you use your vacation home as a second home, you have to pay taxes at capital gains rates and may suffer the Net Investment Income Tax (NIIT).
What is the Net Investment Income Tax?
The NIIT is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts.
If it’s a rental, you face the capital gains rules, NIIT, unrecaptured Section 1250 gain taxes, and release of some (if grouped) or all (if not grouped) passive activity suspended losses.
When you have rental use after 2008 and convert the rental to your principal residence, you must use a rental/residence fraction to determine how you will be taxed.
If you have any questions about the rules in this area, please do not hesitate and Schedule Your Free Tax Assessment Here.