Tax Benefits of a Second or Vacation Home as a Primary Home vs. Rental
A Second Home Has Valuable Advantages
Owning a second home offers many advantages. Of course, one of the primary benefits is that you own a place where you and your family and friends can go and spend as much time as you like without the hassle of having to book a hotel or rental. Another benefit may be that you have a peaceful place to retire. It might also be an investment opportunity in the form of rent money. And finally, last but not least, you may be entitled to some tax benefits by owning a second home.
How the IRS Defines a Home
Many types of structures can be considered a home. The Internal Revenue Service (IRS) identifies a home as a house, houseboat, mobile home, cooperative apartment, or condominium. As long as there are sleeping, cooking, and bathroom facilities, it can be classified as a home. If you are a homeowner, you already know about the tax advantages of owning your primary residence. Second homes can receive tax breaks from the IRS, as well.
Not all second homes are treated alike, however, so if you own or are planning to purchase a second home, you should definitely make sure you are aware of the basic tax rules that affect second homeowners.
If Your Second Home Is Your Vacation Home (You Don't Rent It Out)
If you use your second home for personal enjoyment, generally, your mortgage interest and real estate taxes can be deducted the same as you would on your primary residence.
As a homeowner, you already know that the interest on your first home mortgage is deductible. If you use your second home as a secondary home where you live part of the time and you do not rent it out, then the interest on the mortgage on your second home is deductible, as well. You can write off 100% of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve your properties. Keep in mind that this deduction is for a total of $1.1 million of debt and not $1.1 million on each home.
You can deduct property taxes on your second home. In fact, you can deduct property taxes paid on any number of homes you own.
If You Rent Out Your Second Home
The number of days you rent out your second home is important for determining the number of tax benefits you are eligible for. Basically, if you rent out your second home for less than 14 days a year, then you can treat your second home the same as you treat your primary residence. If you rent out your second home for more than 14 days a year, then the IRS determines that your second home is rental property, which is taxed differently than primary residences. Please note that if you never visit your second home it will be classified as an investment property. In order to be considered personal use of your property, you must use your home. The visits that you make checking in on your house or making repairs or maintenance does not count as personal use and will render your second house to be an investment house.
Rental Period Per Year = 14 or Fewer Days
If you rent out your second home for 14 or fewer days during the year, you can receive the funds tax-free. It doesn’t matter how much you charge for rent, you do not have to claim this amount to the IRS. If you rent out your second home for fewer than 14 days, the home is treated the same as your personal residence and you would deduct mortgage interest and property taxes the same as you would for your primary residence.
Rental Period Per Year = More Than 14 Days
If you rent out your second home for more than 14 days, then you must report all of the rental income that you receive. At the same time, you are able to deduct rental expenses including taxes, insurance, mortgage interest, utilities, housekeeping, and repairs. You can even deduct supplies such as towels and sheets. Moreover, you can write off depreciation, the value lost due to wear and tear of the home over time. The challenge is in determining where to allocate the costs between the time you used the property for personal purposes and the time you rented out the property. You want to keep excellent records of dates, income, and expenses. And, hire a tax professional to properly attribute taxable and nontaxable income.
The key to maximizing deductions is keeping yearly personal use of your vacation home to fewer than 15 days or 10% of the total rental days, whichever is greater. In that case, the vacation home can be treated as a rental, receiving rental deductions. To keep your second home considered a rental property, you must avoid going over the 10% limit. To help gauge the maximum amount of time you can use your home for personal use, basically, you should not use your second home more than one day for every 10 days you rent it.
In order to maximize rental property deductions, you need to be actively involved with the rental process. This means conducting meetings with the tenants and setting rental agreement terms for tenants. And, this is highly important—you need to own at least 10% of the property.
Converting Your Second Home Into Your Primary Residence
A tax advantage strategy that second homeowners use to avoid paying capital gains taxes upon the sale of a second home is to convert their second home into their primary residence. The way to do this is to live in the second home for two years out of the previous five years before selling the home. This qualifies the sale for an exclusion from taxes for a profit of up to $250,000 for single filers and $500,000 for joint filers.
For 2009 and later years, you pay regular 10% capital gains taxes on the portion of the gain that is equivalent to the time you used the home as a vacation home after 2008.
Computing Taxes Is Complicated
Your tax professional will need all the details of how you use your second home. This information must be consistently collected and maintained throughout the year in order for your tax professional to accurately compute your adjusted gross income and your modified adjusted gross income. Confusing? Indeed it is.
Turbo Tax Explains Rental Property Tax Deductions
The IRS has many publications to help you understand the basics of owning a second home and how taxes are applied to ownership. For more information about owning, using, and selling your second home and the tax pros and cons, go to www.IRS.gov and search for the following publications.
- Publication #527 Residential Rental Property (Including Rental of Vacation Homes)
- Publication #523 Selling Your Home
Please note: Every individual has a unique tax situation and while the information stated in this article is true, please use caution when relying on this and any information you read or hear about tax benefits. Before making any tax-related decision, please consult with a tax and/or legal professional for advice.
Time for Vacation
In what type of dwelling did you reside when you went on your most recent vacation?
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.