Second Home Tax Benefits You Should Know

By: ROS Team

Are you planning to purchase a second home to generate a rental income? Or perhaps you’re considering a second residence to retire to or a vacation spot. Whatever the case, it’ll be in your best interest to take advantage of all the available tax breaks. You can save a significant amount of money from tax deductions on property taxes, mortgage interest, and rental expenses. Here is a quick breakdown of second home tax benefits.

What’s a Second Home?

If you randomly ask a mortgage lender, real estate agent, or tax attorney to define a second home, you’ll probably get different answers. Any property that is not your primary residence can be considered a second home, regardless of how much time you plan to spend there.

However, the IRS has clear a definition for what’s classified as a second home — it’s a property that’s used at least 10% of the year as a rental property or one in which the owner only occupies for at least 14 days out of the year.

Common Characteristics of a Second Home

1) Typically, second homes are located in a location other than that of the primary residence. Sometimes lenders require that borrowers’ second homes be located at least 50 miles from the primary residence. Otherwise, the lender identifies it as an investment property.

2) People buy a second home as a vacation house or a retirement home in another part of the country.

3) Second homes become convenient for tax purposes if it’s limited to family use. In doing so, you can deduct a portion of your second home’s property tax and mortgage interest.

Second Home Tax Benefits

The IRS extends many tax benefits to second homeowners. It mainly depends on how much money you are generating in rental income from your second home and how many days you occupy your second home.

• If you rent your home for less than 15 days, it is considered a personal residence, and you can deduct certain expenses like you would for your primary residence. For example, you can deduct your mortgage interest up to $750,000. In addition, whatever money earned from renting out your second home for less than 15 consecutive days you can keep it without reporting it to the IRS.
• In addition to mortgage interest, you can also write off any interest paid on a home equity loan. This tax benefit is only valid if you require a home loan to purchase your second home and if you used a home equity loan to make property improvements.
• Second-home tax deductions also include property tax deductions for your second home. But if you take a property tax deduction on your primary residence, you won’t be able to claim it for your second residence. On top of that, there is a maximum of $10,000 you can deduct per tax return for property tax purposes as a single person. For married couples who file separately, the maximum is $5,000 per person.

FAQs about a Second Home

Can a Second Home Be Considered a Primary Residence?

A primary residence is a home you spend the majority of your time in. Or, according to the IRS, the home where you reside in the majority of the time for the last two to five years. On the other hand, a second home is one that you own, but one you don’t spend most of your time in. To qualify as a second home, you must live in it for at least part of the year, or else it falls in the category of an investment property, or one you rent or lease to tenants.

Can You Change a Property from Second Home to an Investment Property?

It’s possible to have a change of mind such that you want to convert your second home into an investment property. You would need to change your occupancy status if that’s the case. However, experts recommend that you opt to do so after you’ve owned the property for at least a year. So that you can report the rental income to the IRS.

What is the Difference Between a Second Home and an Investment Property?

The second home is chiefly purchased for personal use, while the sole purpose for investment properties is to generate income. Investment properties are rented out as vacation rentals or full-time to tenants. Usually, investment properties are subject to stricter lending terms than second homes.

What Happens If You Sell Your Second Home?

Selling your second home is a bit different from selling your primary residence. You earn capital gains on the primary home. But you can deduct up to $250,000 for taxes as a single filer and $500,000 for a married couple filing jointly on their return. This is not the case with a second home. The IRS considers your second home a real estate investment. So unless you lived in the home for an extended period before you sold it. You will have to pay up to 20% in capital gains taxes.

Conclusion

You can enjoy personal and financial benefits, including tax deductions like tax deductions, with a second home. Having a second home can reap some nice tax benefits as well.  Keep in mind that you cannot take advantage of a double home tax deduction. If you choose to rent out your second home. Also, the second property will be treated as an investment property. And you will have to pay taxes on any rental income earned.

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