If you use the place as a second home—rather than renting it out—interest on the mortgage deductible within the same limits as the interest on the mortgage on your first home.
You may be able to write off 100 percent of the accrued interest you pay up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the properties.
You may deduct property taxes on your 2nd home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes that you might own.
If you Rent out the place
Many 2nd-home buyers rent out the property during part of the year to get others individuals to help pay the bills. There are various tax rules that apply depending on the breakdown between personal and rental use.
If you rent the place out for 14 or fewer days during the year, you can pocket the rental income tax-free. Even if you’re charging $5,000 a week, the IRS doesn’t want to hear about it. The house is considered a personal residence, so you deduct mortgage interest and property taxes under the standard rules for a second home.
Longer Rentals mean different Rules
If you Rent the home for more than 14 days, you then must report it as rental income. You’ll also get to deduct all of the rental expenses, and that gets complicated because you need to allocate certain costs between the time the property is used for personal purposes, and then the time the home is rented out to.
Consider this example
If you and your family use a beach house for 30 days during the calendar year and it’s rented for 120 days, 80 percent of the time (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be considered as rental expenses. The entire amount you pay a property manager would also be deductible, too. You then could claim any depreciation deductions based on 80 percent of the value of the property.
You can always deduct any expenses up to the level of rental income you’ve report. But what if costs exceed the rental fees collected? Whether a loss can shelter other income depends on two things: how much you use the property yourself and how high your income is.
Your use can be limited
If you use the home more than 14 days, or more than 10 percent of the number of days it is rented—whichever is more—it is considered to be a personal residence, then your rental loss will not be able to be deducted.
Why Maintenance Pays
If you limit personal use to 14 days or less than 10 percent, then your vacation home will be considered a rental property and then up to $25,000 in losses may be deductible each year. That’s why many of vacation homeowners hold down leisure use and spend a lot of time “maintaining” the property.
Understand that Fix-up days won’t count as personal use. The tax savings from the loss helps pay for the vacation home. Unfortunately, holding down personal use means you have to forfeit the write-off for the portion of mortgage interest that does not qualify as either a rental or personal-residence expense.
We say such losses might be deductible because real estate losses are considered “passive losses” by the tax law. And passive losses are generally not deductible. But there’s an exception that might protect you.
For More in-depth information on a Vacation or 2nd Home, Reach out to Julie at 480-250-7828