Real Estate Second Home Tax Advantages In a Nutshell

By James Young on May 5, 2014
Real Estate Second Home Tax Advantages In a Nutshell

Congratulations! You’ve decided to take the plunge and buy that second home you’ve always dreamed about. Whether you are purchasing a long-awaited vacation home, seasonal residence or an investment property to bring in some additional income, there are some tax breaks coming your way that can help make ownership of a second home more affordable.

Real estate second home tax advantages

The first thing to keep in mind about tax breaks for a second home is that different tax rules will apply depending on how you use your property:

  • personal use;
  • rental income; or
  • combination of the two.

Second home as residence

Did you purchase a new vacation home, a condo at your favorite vacation spot or a house in Florida to escape the worst of the winter weather? As long as you aren’t using your real estate as a rental, you can deduct mortgage interest at tax time just like you do your primary residence, up to $1.1 million of debt across both homes combined.

Like other real estate, you can also deduct your property taxes on your second home, although you won’t be able to write off expenses like utilities or upkeep unless you can show the property includes an office devoted to your business.

Rules are more complex for rentals

Less straightforward are the tax rules that apply to your second property if you are renting it out. Although more complex, the tax rules that apply can generally be applied according to the number of days your property is rented out each year.

If your property is rented out for 14 days or less during the year, you do not have rental income as defined by the tax laws. The house is still considered a personal residence, so you can just go ahead and deduct mortgage interest and property taxes like you would with your primary residence.

But if you end up renting out the property for more than 14 days, you will need to report rental income. On the other hand, you also have the opportunity to deduct rental costs. However, expenses must be allocated between the portion of time the property is rented and the portion it was used personally.

If your rental costs outweigh your rental income, you may be able to shelter other income with the loss, depending on how high your income is and how many days out of the year you are using the property yourself.

If your second home is used for personal use for more than 14 days or more than 10 percent of the days it’s rented, whichever is greater, the property is considered a personal residence, so you can’t deduct the loss. You can, however, still deduct the interest that doesn’t go toward a rental expense.

Second homes as rentals

However, if you only use the residence yourself for 14 days or fewer (or less than 10 percent of days rented), that second home is considered to be a rental and up to $25,000 in losses could be deductible in any given year. Armed with this knowledge, many vacation homeowners restrict leisure use and spend more time maintaining the property since “fix-it” days don’t count toward personal use.

Tax savings from the ability to deduct a loss (up to $7,000 a year if you fall into the 28 percent tax bracket, for example) can be put back toward the mortgage on your second home, allowing you to pay it off faster.

Limitations to deductions

Keep in mind, however, you can’t have it both ways. If you are going to restrict your personal use in order to take the above-mentioned deduction, you won’t be able to take the write-offs for the portion of mortgage interest that can’t be applied as either a rental or personal-residence expense.

There are other limitations. Real estate losses are considered “passive losses” by tax law, meaning they usually are not deductible. But, if your adjusted gross income is less than $100,000, you can deduct up to $25,000 in losses each year to offset other income, such as your salary.

If your income tips over the $100,000 mark, that $25,000 allowance evaporates. You can, however, store passive losses and use them later on to offset taxable profit when you eventually sell that second home.

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About James Young

My name is James Young- I love red wine, sailing, and playing guitar. I believe that everyday is truly a gift. I'm blessed to live five minutes from the sand in the beautiful city of Long Beach, CA. When I'm not assisting homeowners, you'll find me belting melodies with friends around a campfire, wandering the halls of an art exhibit, or watching ESPN re-runs until the sun comes up. So what am I doing here, you might ask? In a couple of sentences- I'm passionate about empowering first-time and experienced home buyers to make their dreams a reality. Whether it's saving thousands on your home loan, buying your first home, or acquiring your first investment property, I'm always here to help. Don't hesitate to ask questions, and please remember to "share the love"! :) #loveloans #loverealestate #lovelife!