Second Home Tax Deduction for a Fractional Owner

Fractional Ownership

Fractional ownership refers to financial arrangements in which a group of families or individuals own percentages of a specific property. Sirkin and Associates lists several ways in which groups are assembled, including by a Realtor, seller, buyer or an already-established group of friends or families. Each owner is allowed to use the property based on a usage schedule. The owners split the rental income or maintenance expenses generated by the property. Depending on how the second home is used, each owner may be able to deduct his portion of the expenses.

A second home with less than 1 million dollars in loans that is not rented out and is only used by the owners is treated by the Internal Revenue Service as a qualified home for tax deductions. When a second home is rented out, the owners must use it "more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer" in order to avoid being regarded as a rental property, according to IRS Publication 946. If these conditions are met, the home is considered a qualified second home with deductible mortgage interest and property taxes. Pure second homes usually do not qualify for deductions for maintenance or other expenses.

A rental property must be rented for more than 15 days a year to be considered a pure rental property, according to June Fletcher of "The Wall Street Journal." The owners cannot use the home more than 10 percent of the rental days during the year. For example, if the home is rented 100 days of the year, the fractional owners cannot use the property more than 10 days during the year. IRS publication 527 lists common rental expenses for deduction for a rental property, including advertising, cleaning, maintenance, insurance, commissions, legal fees, management fees, mortgage interest, utilities and taxes.

When a second home fails to fulfill the requirements for a qualified home or a rental property, it may be considered a vacation home used as a hobby rental, according to the accounting firm of Greenstein, Rogoff, Olsen & Co., LLP, CPAs. The year is divided into two portions: one considered personal use and the other considered rental use. The IRS does not allow deductions of rental expenses that exceed the rental income for the home. Personal use of the home includes use by any owner as a vacation property, use by any relatives of the owner as a vacation property, property sharing or swaps and anytime the home is rented at less than fair-market rental price.