If you've been using your vacation home just for your own enjoyment, you're tax breaks on mortgage, taxes, and expenses you pay on it are limited. Turning it into an investment property can not only bring in some extra income but increase your tax breaks for holding it -and still allow you to enjoy it.
Your vacation home becomes recognized as an 'investment' for the IRS investment tax breaks if you rent it out more than 14 days per year and restrict your personal use of it to either 14 days or 10% of the days you rent it - whichever is more. By renting it more than 14 days per year, you can treat it as a rental property (IRS Pub 527 on rental and vacation home property) so you can deduct all your rental expenses subject to the passive loss rules.
The passive loss rules restrict your annual rental loss to the extent of its rental income. But if your adjusted gross income (AGI) is $100,000 or less, you're allowed to claim rental losses of up to $25,000 each year even if they are above your rental income. This 'allowed loss' is phased out as your AGI increases from $100,000 to $150,000 (check if current phase out limits are higher at the time of your reading this).
*So what are those rental expenses?
Rental expenses include all your Schedule E expenses as for any property. That means advertising, annual maintenance costs, mortgage interest, and property taxes. And it means depreciation too. Remember, depreciation is a book keeping amount that doesn't take any cash out of your pocket; it's an amount of loss attributed to the rental building during the time you own it; it's wholly independent of maintenance costs.
Hopefully you can earn some serious rental income. But often it doesn't take much rental income to cover your yearly out-of-pocket expenses to maintain your rental. But your costs including annual depreciation can still exceed your rental income to produce a net 'allowed' loss. Use that loss to offset your personal income - if you're AGI is low enough as mentioned above. That's an important tax break...
The depreciation loss that shelters your personal income from tax while you're getting rental income that covers 'out-of-pocket' expense is a real help to you. And, you get to use your rental home for some 'free' vacation use for a couple of weeks too.
*No thanks, I want to use it a lot for myself:
If you don't make it an investment (i.e. as a rental) property, you really only have mortgage interest and property tax deductions you can take on it. And those generally require you to itemize your deductions, and often that's the case due to the mortgage on your principal home and the working income taxes you have.
But if that's OK with you, realize you can still rent it, but for only 14 days per year. And that rental income you receive for those 14 days or less is tax free. That's a boon.
If you rent it for more than 14 days and your personal use is also more than 14 days and more than 10% of the rental days, then you can deduct some additional but limited expenses (including depreciation) but only up to the extent of rental income your receive - and claim on your return.
So, a vacation home can put more money in your pocket than just its long term appreciation value. With it you can have your cake and eat it too.