Suppose your clients, Bill and Betty Avila own two homes. Their first home in Grosse Pointe, Michigan is their primary residence. Their other home is in Scottsdale, Arizona. They always treated their Scottsdale property as a second home for which they deduct the mortgage interest and real estate taxes on their Schedule A of their Form 1040 each year.
Their son, Justin, has taken to ski racing, so the Avila's have found that they have no time to spend at their Scottsdale property anymore. They spend the majority of the winter months traveling to his ski race locations.
They have asked you what the tax implications are if they rent their Scottsdale property, as opposed to holding it as their second home. Please write a memo outlining the Federal income tax difference between holding the Scottsdale as a rental property vs. a second home. You must consider the following:
1. Rules regarding the rental of a vacation home
2. Effect of passive activity loss rules
a. The Avila's have no other passive investments at this time.
3. Impact on itemized deductions, including the new itemized deduction phase out applicable in 2013
4. You can ignore any investment income tax or AMT implications
You may include a spreadsheet with your memo to support your analysis. The following facts for 2013 may be applicable.
Expected adjusted gross income in 2013 (excluding any rental) $500,000
Itemized deductions (excluding deductions related to the Scottsdale home) $30,000
Scottsdale home details
Adjusted basis $350,000
Fair market value $500,000
Assume date of conversion to rental is 1/1/2013
Mortgage interest $17,500
Real estate taxes $5,000
Association dues $2,400
Expected rental income - renting from December through April $10,000
Expected days of rental use: 120
Expected days of personal use: 10
Anticipated maintenance costs $1,000