Aug
15

Tax breaks on Second Homes

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Second homes or Pied-a-Terre’s often offer owners tax breaks that are similar, but not identical to, those for primary residences.  You may also be able to earn additional income that could help the bottom line tax.  The second home could be an attractive investment when you consider the potential for long-term appreciation along with the potential income and tax breaks.

You should consult with a qualified tax attorney or CPA when trying to figure out tax implications on transactions involving real estate.  The laws change frequently, and they can keep you apprised of the latest information and help you maximize your tax advantages.

In general, how it works:

  • Mortgage interest up to $1 million of “acquisition indebtedness” incurred when buying the primary and on additional interest can be deductible.  If your combined mortgages exceed $1 million, the interest paid on the first $1M could be deductible.
  • Second homes can be timeshares, yachts, motor homes, as long as it includes sleeping, cooking and bathroom facilities.
  • Gains from selling a second home are generally taxed as a short-term or long-term capital gain.  While the sale of a principal residence can be excludable, gain on the sale of a vacation/second home is not.  Recent rule changes limit the amount of prior gain on a vacation/second residence that can be sheltered if that home is converted to a primary residence.
  • Vacation Home Rentals – many owners rent vacation homes to earn income and help pay for the cost of owning the home.  These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.
    • Income from rentals totaling not more than 14 days per year is nontaxable under current guidelines.
    • Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E Supplemental Income and Loss on your 1040.  Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities and other expenses to offset that income.  That deduction depends on how many days they use the residence personally versus how many days they rent it.
    • Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true rental property if certain rules are followed.

 

This post is provided as informational purposes only and should not be construed as legal, accounting or tax advice by the RealEstateGeezer. You should seek advice from a qualified professional.

 

Excerpted from Presti & Naegele Accounting Offices newsletter

 

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