In addition to offering a break from our day-to-day grind, vacation homes can also offer us a break from our taxes. Second homes can present a number of opportunities for deductions and revenue potential, but be sure to think about possible expenses as well. We’ve rounded up a few considerations to keep in mind before purchasing your second home.
What Qualifies as a Vacation Home
Budgets of all shapes and sizes can fit within the IRS’s definition of a vacation home. In the eyes of the IRS, a vacation home is one that is permanently in place and offers cooking, sleeping, and toilet facilities. This would include a:
- Shore or Lake Home
- Condo
- Co-op
- Mobile Home
- RV
- House Trailer
- Yurt
- Yacht
If a tent is all your budget has room for, you may be out of luck – bare land doesn’t count.
Mortgage Interest
One of the first decisions you’ll need to make in regards to your vacation home is whether or not you want to rent it out. If you choose not to rent it out then the interest on the mortgage of the home is deductible. You can write off 100% of the interest you pay up to $1.1 million of debt secured by your first and second homes that was used to buy or improve the properties. Be careful – this will change if you decide to rent out the property in the future.
In addition to mortgage interest, generally speaking, you can deduct property taxes as well as state and local real estate taxes on your second home, too!
Renting Out the Property
If you decide to rent out your vacation home for part of the year to help supplement your income, be sure to keep meticulous records of your rental schedule. If you rent your property out for less than 14 days a year, any money you earn will not be taxed. Your house will still be considered a personal residence and the IRS does not need to see your rental your records.
However, if you rent your property for more than 14 days a year, you must report all of your rental income to the IRS. Assuming that you split the use of your home between rental and personal use, you will be able to deduct rental-related expenses on a Schedule E tax form and deduct anything attributable to your personal use, like a percentage of the utilities and insurance premiums, on a Schedule A tax form.
There are several other factors, such as business rentals, home improvement costs, and potential monetary losses that should be discussed with a tax professional before purchasing a vacation home. To address these considerations and learn more about the home buying options that are best for you, contact our tax professionals.