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Passive Activity Loss – v – Vacation Home Loss

Passive Activity Loss

Where your personal use days are less than the greater of 14 days or 10% of your rented days; any losses are considered “passive activity loss”.

Example – Rental income = $15,000.  Expenses = $20,000.  Total of rented days is 200 and total of personal days is 10.  The expenses of $20,000 are pro-rated by 10/210 = 95.24% business use.  $20,000 x 95.24% = $19048 of allowable expenses.  Rented income of $15,000 – Expenses of $19048 = $4048 Passive Activity Loss.

Unlike “vacation home loss”, “passive activity loss” can be used to minimize Capital Gains Tax

Vacation Home Loss

Where your personal use days are more than the greater of 14 days or 10% of your rented days, any losses are considered “vacation home loss“. Expenses incurred during the year are pro-rated between the total number of personal use days divided by the total number of rented days plus the total number of personal use days. The expenses are then used up to the amount of rental income received and the balance of any unused expenses are then carried forward to the following tax year as “vacation home loss”.

Personal Use Days are any days that you or your friends and family use the property for no charge or less than “fair rental” charge. Days that you are in your property carrying out maintenance or repairs etc. are NOT personal use days.

Example – Rental income = $15,000. Expenses = $20,000. Total of rented days is 200 and total of personal days is 25. The expenses of $20,000 are pro-rated by 25/225 = 88.89% business use. $20,000 x 88.89% = $17,778 of allowable expenses. The expenses are used up to the amount of the rental income of $15,000 giving a Carry Forward Vacation Home Loss of $2,778.

Please note that Vacation Home Loss can only be used to minimize your annual income tax payment to the IRS; it CANNOT be used to minimize Capital Gains Tax at the time of sale.

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US Income Tax Compliance for Nonresident Owners of US Rental Property

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