Vacation Home Tax Implications

A €3M apartment on the Riviera can turn into a €1.5M tax bill - unless you structure it right. A U.S. family recently shared their dream with me: acquiring a €3M apartment on the Riviera, a place for parents, children, and grandchildren to gather for generations. But with that dream came a crucial question: how to structure the purchase so it would be an asset, not a burden? Because in France, the structure determines everything that follows: ⭢ French Real Estate Wealth tax (IFI). Above €1.3M of French real estate, IFI applies. Loans can reduce the taxable base, but the rules are nuanced and the French tax authorities take a strict view. By documenting shareholder loans correctly from the outset, we positioned the family to defend a very low or even nil exposure over the next decade. ⭢ Occasional rentals. In the U.S., renting a home a few weeks per year is simple. In France, furnished rentals can trigger corporate income tax, immediate taxation of unrealised gains, and restrictions on free use by the family. To preserve flexibility, we created a structure where an operating company would handle any future rentals, while the ownership vehicle remains clean. ⭢ Succession planning. This is where true value lies. Without planning, French inheritance tax can reach 45% on children’s shares of French property. By splitting bare ownership (nue-propriété) from usufruct at the SCI level, the family aligned with the France–U.S. estate tax treaty and ensured that, upon the parents’ passing, full ownership would transfer to the next generation without French inheritance tax leakage. ⭢ Future resale. Even if years away, anticipating now how the property might be sold gives the family more flexibility, and potential tax efficiency, later. The lesson is simple: buying French real estate as an international family is never just about signing a deed. It’s about aligning lifestyle, wealth preservation, and cross-border tax rules from day one. For this family, the apartment is not only a holiday home. It’s a legacy, secured by the right structure.

"We know that the house in Lake Tahoe is your happy place, so your mother & I would love to gift this property to you & your family". Waterfront property in the majestic Lake Tahoe... what a generous gift! 🏡 But what if our children decide to settle down on the East Coast & we want to be closer to them? This was a question one of my clients was grappling with after his parents expressed their desire to give him the family vacation property in Lake Tahoe. My client's parents knew that the Tahoe home was their son's "happy place" and they wanted him & his family to be able to experience many wonderful memories at this place. His parents were also seeking to proactively get their estate plan in order. My client was thrilled by the opportunity to receive the gift of Tahoe Home that he has fond memories of while he was growing up. He asked me, "Chris - is there anything that we're not thinking about before accepting this gift?" I'm sure glad he shared this with me & raised this question! Turns out, his parents originally acquired this property in the early 2000's for $240k. Based on recent home sales nearby, the current value of the home is likely north of $4M. Given the significant appreciation, I cautioned that if he accepted this property as a gift, he would take over the donor's adjusted basis of the property. Adjusted basis = purchase price + any home improvements. Since the adjusted basis is so low relative to what this home is currently worth, this could result in significant tax consequences if my client chose to sell this property in the future. Whereas, if my client received this home as part of his inheritance (upon death of the original owner), then he would acquire the property with a "stepped-up" cost basis. The step-up in basis would result in my client acquiring the Tahoe home for the Fair Market Value on the date of death (i.e. ~$4M), therefore eliminating $3.5M of embedded capital gains & $800k+ of taxes upon the eventual sale of this property. I also raised the opportunity that if his parents are seeking to do estate planning for their personal situation, there are some advantageous methods of gifting property from a tax perspective, such as a Qualified Personal Residence Trust. This type of trust shifts the residence to "outside the estate" of his parents & can help reduce the amount of gift tax that would be incurred when transferring assets to a beneficiary. Given what is at stake, we agreed to have a three-way meeting with my clients & his parents to discuss the objective for the Tahoe Home and the most effective way to accomplish this goal. Inheriting a $4M property in beautiful Lake Tahoe is certainly a fortunate "problem" to encounter. However, the purpose of sharing this post is to highlight the importance of communication between individuals & their advisor, as well as the potential benefits of thoughtful planning around multi-generational gifting.

Stop vacationing at your STR! You're killing your tax savings. Many people are aware of the vacation rental rule that you can use a property up to the greater of 14 days OR 10% of the days rented. If you stay below these numbers, you can still take net losses from your STR. But if you go above these thresholds, you are not allowed to take losses from your STR, and the losses are suspended to a future year. For example, if you rent your STR for 250 days, you can personally use the property for up to 25 days and still recognize losses from the property that year. But don’t forget this part… If you use the property for even a single day personally, you need to calculate the % of days the property was used personally vs. the days it was used as a rental. Why? Because you used it personally, you can’t deduct 100% of the property costs. However, if the property was 100% used as a rental, then you can take 100% of the property costs as a deduction against the rental income. EXAMPLE: Let’s use the same numbers above. - rented the property for 250 days - used the property personally for 25 days - total days it was used is 275 days The rental and personal use percentages would be about 91% and 9%, respectively. Why does this matter? Because your expenses such as: - mortgage interest - property taxes - insurance - repairs - utilities - depreciation will all need to get prorated to determine the amount of these expenses you can deduct against the rental income you received. And if this is a year that you perform a cost segregation study, the lost deductions from depreciation can be huge! The higher your tax bracket, and the more bonus depreciation you get from a cost segregation study, the more detrimental having personal days will be to your tax savings. Be sure you understand these rules before vacationing at your own property. --- If you found this helpful, like 👍 and follow me for more content like this.

Scenario: → You live in Miami and rent right now.  → You are under contract on new construction vacation/rental home in Park City which will close in 2025.  → Eventually, you want to buy a primary residence and settle back in the Bay Area in 2027. You have a 2 year old and will likely have a 2nd child in the next year You make $750K+ per year in total cash compensation and have $2M+ liquid after-tax investments with more coming in the form of liquidity events and trust distributions This is where things get INTERESTING for us as planners 1. Primary residence vs. Investment property → Property tax  → Income tax → Rental income tax implications → Capital gains tax implications in the future What are the projected annual carrying costs of the property? 2. Income Projections and Cap Rate: Scenario 1: Seasonal Rental / STR Scenario 2: Long-term Rental 3. Break-Even Analysis: How long will it take to break even on their investment considering the projected capital outlay, rental income for UT, and expenses? → Scenario 1: $500k of home equity at closing → Scenario 2: $750k of home equity at closing → Scenario 3: $1M of home equity at closing Capital gain implications They can exclude up to $500k in capital gain on sale of residence as long as it has been their primary residence for 2 out of the last 5 years. What is the optimal balance between personal use and rental to maximize financial returns without jeopardizing tax benefits? 1. Non-Taxable Rental status → Rental for less than 15 days in a year → Income is realized, but not recognized (not reported on tax return) → No expenses may be claimed against income 2. Primarily Rental status → Rented for more than 14 days → Personal use is less than the greater of: 14 days 10% of rental days → Income is recognized → The ability to claim loss may be limited by passive activity rules 3. Mixed-Use status → Rented for more than 14 days → Personal use exceeds the greater of: 14 days, or 10% of rental days → Income is recognized and allocable expenses are deductible to the extent of income Financial Modeling → 10 Year Cash flow model with detailed inflows, expenses, and income tax figures (Assumptions for child care, private school, changes in income, conservative investment return, liquidity events, etc) → Break even analysis on each property given assumptions around purchase price, interest rate, property taxes, maintenance, property management for the rental, etc → Investment plan for the next 4 years factoring in large chunks of capital needed for closing costs and down payment Just yesterday I was able to show them that this was all feasible and how we can get there with the proper disciplined approach -- it was eye opening for them to see the next 10 years laid out in black & white. If this resonates with you, consider sharing it with your network to spread the word about smart financial planning.

The Australian Taxation Office have released a series of draft rulings and practical compliance guides concerning the tax treatment of rental properties, including holiday homes. "... owners should assess whether their property is genuinely available for rent during peak periods, and if private use dominates they should expect deductions to be denied." - Hayley Lock, Partner, KPMG AFR Article - https://lnkd.in/gMRegQQu Draft ATO Rulings & Practical Compliance Guides: TR 2025/D1 - Income tax: rental property income and deductions for individuals who are not in business - https://lnkd.in/gjS3h5AR PCG 2025/D6 -Apportionment of rental property deductions - ATO compliance approach - https://lnkd.in/gPSu6Ccv PCG 2025/D7 - Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out - ATO compliance approach - https://lnkd.in/gsuSSH6S Comments on the drafts are due by 30 January 2026. #tax #property #Airbnb #holidayhomes #privateclients #investments #mdeanca

High-net-worth individuals and business owners often invest in luxury assets like vacation homes, boats, and even pools—but did you know these can come with significant tax benefits if structured properly? Here are a few ways smart tax planning can turn these expenses into strategic advantages: ✔️ Vacation Homes – Mortgage interest and property taxes may be deductible, and if rented out, depreciation and maintenance costs could qualify as business expenses. A properly structured 1031 exchange can also defer capital gains taxes when selling. ✔️ Boats – If used for business (client entertainment or rental income), some costs—fuel, maintenance, and depreciation—may be deductible. Boats with sleeping, cooking, and toilet facilities may even qualify for a second home mortgage interest deduction. ✔️ Swimming Pools – If a doctor prescribes a pool for a medical condition, installation and upkeep costs may be deductible as a medical expense. For rental properties, maintenance and depreciation may qualify as business deductions. At Bennett Thrasher, we help business owners, real estate investors, and high-net-worth individuals maximize tax efficiency while preserving wealth. If you own a vacation home, boat, or pool and haven’t explored these strategies, let’s talk. 👉🏻📧Emily.Ackerman@btcpa.net