Tax planning question

[Tom Mitchell]

If one has a second home in a high-tax state that rents for more than 14 days a year and is used more than 14 days, would it make sense to convert it to a rental property, given the new tax law?

[Ashish Acharya]

@Tom Mitchell , 

To clear your question, generally, when you say convert second home, you mean changing its status form vacation home to full rental designation because "vacation home" rules limit your deduction on the operational expense and depreciation deduction up to your rental income. 

Also, I am guessing you are referring to 20% passthrough deduction when you say new law. I personally think, even without the new law, you should always avoid the vacation home rules. 

If you structure your personal usage of the vacation home, you can avoid the vacation home rules and get the full deduction for the depreciation and operational expenses. This will more likely create a loss or mostly eat your rental income.  If you have a loss, there is no immediate benefit from the new 20% deduction. ( Loss in general from RE is good if your AGI is less than 150k :).

If you have a net income( which should be low given high tax state and with depreciation), yes 20% deduction "MIGHT" come into play. I say  MIGHT" because we dont know if IRS will allow the rent from a house with personal usage as qualified business income. We are still waiting on the clear guidance. 

Ignoring the new law, you should always try to structure your personal use so that you would avoid the vacation rules. And remember you can use home more than 14 days and still avoid the vacation home rule. its greater of 14 days or 10% of rental days. If you rent for 300 days, the threshold is 30 days of personal usage. So even if you use more than 30 days, the house will escape vacation home rules.