Are You Feeling a Bit Confused? Learn About the Tax Advantages of Buying a Second Home
In order to figure out what tax breaks are related to your purchase of a second home, then you need to know how the Internal Revenue Service is going to view your purchase.
If you are going to make personal use of your second home at least part of the year as a vacation getaway, for instance, then it may be considered a residence.
However, if you rent it out, it will be considered investment or rental property.
In order for your vacation home to qualify as a residence, however, IRS rules say you have to spend at least 14 day there.
If you rent it out part of the time, you need to spend at least 10% of the time that the home is rented out in order for it to qualify as a residence.
This is important for tax purposes because you cannot deduct mortgage interest on your property as home mortgage interest if it is not considered a residence.
If you time it right, you can rent out your property and still have it qualify as a residence under IRS rules.
It simply depends on how much time you have it rented out.
If you have a great cabin by a lake and you rent it out for three months during the winter and three more during the summer, you will have to spend 18 days there to have it qualify as a residence, so timing is of the essence, as is knowing the amount of time your property has been rented.
The point in this is avoiding having to declare part of the mortgage interest against rental income on Schedule E.
If you time things just right, you can deduct your mortgage or real estate taxes totally on Schedule A.
It avoids confusion, hassles and paperwork.
On the other hand, if your second home is a rental property, then the whole concept flips around.
You cannot use the home for more than 10% of the time that it is rented or 14 days, or passive loss rules will kick in on rental property.
These rules apply when you lose money from passive activity like participation in a limited partnership or property rental.
When this really comes into play is if the expenses that you can deduct are more than the income from your rental property.
You may claim up to 25 thousand dollars in losses per year from vacation home rentals, but your income must be less than $100,000.
On income greater than $100,000, any allowable loss decreases until your income goes to $150,000, in which case allowable loss is eliminated.
In addition, any loss may be offset by passive income.
In any event, there are some simple things that you must remember: 1.
All expenses are deductible against rent if you do not use the property.
2.
The rent you receive does not have to be reported if you rent it out for less than 14 days.
3.
If you use the property for more than 14 days per year, there is a proration of expenses against income.
Another thing to keep in mind is that the tax breaks will depend entirely on the use you make of the property.
It is always best to consult your tax advisor on these matters.
If you are going to make personal use of your second home at least part of the year as a vacation getaway, for instance, then it may be considered a residence.
However, if you rent it out, it will be considered investment or rental property.
In order for your vacation home to qualify as a residence, however, IRS rules say you have to spend at least 14 day there.
If you rent it out part of the time, you need to spend at least 10% of the time that the home is rented out in order for it to qualify as a residence.
This is important for tax purposes because you cannot deduct mortgage interest on your property as home mortgage interest if it is not considered a residence.
If you time it right, you can rent out your property and still have it qualify as a residence under IRS rules.
It simply depends on how much time you have it rented out.
If you have a great cabin by a lake and you rent it out for three months during the winter and three more during the summer, you will have to spend 18 days there to have it qualify as a residence, so timing is of the essence, as is knowing the amount of time your property has been rented.
The point in this is avoiding having to declare part of the mortgage interest against rental income on Schedule E.
If you time things just right, you can deduct your mortgage or real estate taxes totally on Schedule A.
It avoids confusion, hassles and paperwork.
On the other hand, if your second home is a rental property, then the whole concept flips around.
You cannot use the home for more than 10% of the time that it is rented or 14 days, or passive loss rules will kick in on rental property.
These rules apply when you lose money from passive activity like participation in a limited partnership or property rental.
When this really comes into play is if the expenses that you can deduct are more than the income from your rental property.
You may claim up to 25 thousand dollars in losses per year from vacation home rentals, but your income must be less than $100,000.
On income greater than $100,000, any allowable loss decreases until your income goes to $150,000, in which case allowable loss is eliminated.
In addition, any loss may be offset by passive income.
In any event, there are some simple things that you must remember: 1.
All expenses are deductible against rent if you do not use the property.
2.
The rent you receive does not have to be reported if you rent it out for less than 14 days.
3.
If you use the property for more than 14 days per year, there is a proration of expenses against income.
Another thing to keep in mind is that the tax breaks will depend entirely on the use you make of the property.
It is always best to consult your tax advisor on these matters.