Q: We have just purchased a condominium on the Eastern Shore. We would like to use it for our own enjoyment, but at the same time there is a good rental market for our unit. We understand there are some new tax rules regarding the use of vacation homes. Could you explain?

A: A couple of years ago, when Congress was considering tax reform legislation, there was an effort to curtail what used to be known as the "vacation home tax shelter."

Generally speaking, the homeowner who itemizes deductions can deduct for tax purposes all mortgage interest payments, and real estate taxes paid to the local jurisdiction in which the property is located. But when the property is used for business purposes' - i.e., rental - there are other deductions that the tax laws permit. Maintenance and operating expenses and depreciation are perhaps the largest deductions that benefit business property owners.

Thus, the owner of a rental property often finds that there is a substantial tax loss (called a shelter) at the end of each year, despite the fact that the property is fully rented and is appreciating in value each year. For this reason, real estate investment is attractive to many taxpayers.

For many yeas, taxpayers were taking advantage of the business tax deductions in the use of their vacation homes. The taxpayer would purchase a summer home on the beach, rent it out for two months and use it for one month, but still obtain all of the "business tax" deductions. Needless to say, this was a "loophole" that Congress wanted to close.

The Tax Reform Act of 1976 attempted to limit these deductions. While this is extremely complex, and it is strongly suggested that you contact your tax attorney or your accountant, let's look at the basic guidelines:

Under any circumtances, if you itemize, you are always permitted to deduct the mortgage interest and the real estate taxes.

If you rent the home for fewer than 15 days during the tax year, the rental income you get is not included in your gross income for tax purposes. But you are not permitted to deduct any of the business expenses relating to the rental - i.e., the depreciation or the maintenance.

If you use the vacation home for "personal use," and you rent the property for 15 or more days during the taxable year, then you must report the rental income. The deductible expenses, however, (other than interest and taxes) are limited to the amount by which your gross rental income exceeds the deductions otherwise allowable for the property (e.g., interest and taxes).

In other words, if you have used your home for 15 days or more during the taxable year - or more than 10 percent of the number of rental days, whichever is greater - the tax law treats your vacation home as your personal residence. Under these circumstances, you cannot deduct more than the actual rents, less the normal real estate deductions.

Additionally, the expenses must be allocated between personal and rental use. Use the following formula to determine the maximum deductions: total expenses multiplied by the total days at fair rental divided by the total days unit is used.

To further complicate this picture, Congress also defines "personal use." Thus, whether you or your relatives use the vacation home, it is considered "personal." And even if you devise a scheme whereby you and your neighbor rent each other's vacation home, this is considered "personal use" under the new tax laws.

However, it is not considered "personal use" if you spend a day or two in the property cleaning, painting, repairing or doing other maintenance work in your house.