Applying Your EA Continuing Education to Taxpayers with Vacation Homes

Passing the enrolled agent exam permits you to help taxpayers with a variety of tax issues. There's no shortage of potential clients with common situations that involve complex tax reporting. For example, after obtaining the enrolled agent designation you can market yourself as a tax expert to the many individuals with vacation homes.

Handling the deduction of expenses for a vacation property is fairly simple if it's a second home. The mortgage interest and real estate taxes are tax deductible just as with a primary residence. The trouble begins if the property is rented during part of the year.

That affects how to handle the deductible expenses.

People with vacation homes that they occasionally rent need to know about the valuable knowledge you possess from your enrolled agent course studies. Rental of a property for less than two weeks during the year is ignored for federal income tax purposes. The rent received is not taxed. But there are also no tax deductions, except mortgage interest and real estate taxes just as if the property was never rented.

Rental of a property used by the owner and also rented for more than 14 days triggers some detailed tax accounting.

This situation requires dividing the expenses into categories for the personal usage and rental usage periods. You can perform this exercise for taxpayers because it's addressed in your EA continuing education.

The calculation applies the number of rental days as a percentage of the entire year to determine deductions associated with rental activity. This creates a rental tax deduction for a portion of some normally nondeductible household expenditures – such as utilities and repairs. Of course, these deductions reduce the tax impact of the rental income.

Expenses during the percentage of each year that the property is personally used are not deductible – except for ordinarily allowed deductions on second homes. This includes mortgage interest and real estate taxes and casualty losses.

Another case where your EA CPE is deployed in figuring out a complicated tax matter is when the vacation home owner occupies the property for more than 14 days or 10 percent of the days it is rented, whichever is greater. In such circumstances, you can't permit the taxpayer to use the vacation home to create a loss for its second use as rental property. Expenses for the percentage of rental time are still deductible but only up to the amount of rental income. Excess rental period expenses are carried over to subsequent years.

There are fewer limitations on loss deductions for properties converted from personal use to rental activity during the year. In addition, these conversion events are when you want taxpayers to begin utilizing your enrolled agent expertise. When individuals start using  vacation homes for rental purposes, they need professional tax advice. Make sure they can find you for this important service.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.