Wouldn’t it be nice if you can get a tax deduction for your vacation home?
In this article, we’ll show you how we helped one of our clients turn their vacation home into a tax deductible business asset.
Now, we have to warn you, the laws are complex and even the slightest deviation from the law will destroy your deduction but with the right tax planning and documentation you can use the law to your advantage like our client does.
Our client is an investment trader based in Los Angeles and operates a hedge fund based in London. They also own a fairly large beach front property in Florida. Our client also holds regular meetings in London with their UK based staff. These meetings usually last for at least three days. Well, instead of holding those meetings in cold and dreary London, we advised our client to start holding these meetings at their Florida property so they can start to take a tax write off for their vacation home, which they weren’t really using as a vacation get-away anymore.
As a result, our client began using the Florida property to:
a) meet with their investment advisors
b) meet with their London based traders
c) meet with current and prospective clients
d) meet with other partners in their business
As you can tell, these are all valid business activities. What is not considered a valid business activity is using the beach property for entertainment purposes. Regardless of how minor the use, using the home for entertainment purposes disallows any deductions for the property. We therefore advised our client to avoid letting their business guests bring their family members to the meetings. The message here is to avoid using the property for business “entertainment”. The law does not consider business meetings with employees, shareholders, agents, clients and directors to be using the property for business entertainment. While the rules are tough, they don’t prevent you from using the property for some social actives provided the primary purpose of the meetings is not social or non-business related.
Now the best part. How did our client benefit from using the property for business meetings? Well, if they used the Florida property exclusively for business meetings, they would be able to write off 100% of the operating costs of the property, including mortgage interest and property taxes, which in our client’s case was over $100,000 a year. As we advised our client, the deductions get even better if our client uses the vacation home for overnight business lodging, in essence like a business hotel. Why? Simple, because our client can also take a tax deduction for business lodging.
If, however, our client was to use the property for personal use, then they will need to allocate the expenses between business and personal. For example, say our client uses the property 15 days for business meeting, 14 days for business lodging and 7 days for personal purposes. Our client will be able to deduct 80% of the operating costs and depreciation on their vacation home.
All in all, this strategy is a nice way to let Uncle Sam subsidize your retirement property and, in our client’s case, make their London based staff happy by giving them an escape to the Florida sunshine.
