31 May Cheat Sheet on Second Home Tax Rules

Are you in the market for a second home but are not sure about the tax benefits or what needs to be reported? Here’s a quick summary of the tax rules for second homes:

Second home use

If you use the place as a second home and not a rental, interest on the mortgage is deductible just as interest on the mortgage on your first home is. You can write off 100% of the interest you pay on up to $1.1 million of debt. You can also deduct property taxes paid on any number of homes you own.

Rental use

Many  second-home buyers rent their property part of the year. If you rent the place out for 14 or fewer days during the year, that income is tax-free regardless of what you are charging for rent.

If you rent for more than 14 days you must report all rental income. You also get to deduct rental expenses, which can get complicated because you need to divide costs between the time the property is used for personal purposes and the time it is rented.

If you and your family use a beach house for 30 days during the year and it’s rented for 120 days, 80% (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be rental expenses. The entire amount you pay a property manager would be deductible, too.

If you limit personal use to 14 days the vacation home is considered a business and up to $25,000 in losses might be deductible each year. Fix-up days don’t count as personal use.

Tax-free

Although the rule that allows home owners to take up to $500,000 of profit tax-free applies only to your principal residence, there is a way to extend the break to your second home: make it your principal residence before you sell.

**Please note: This article is for informational purposes ONLY, you should consult a tax attorney or accountant to determine actual tax ramifications.