Jonah Patel
Whether a property is considered a second home or an investment property for tax purposes depends on how often it is occupied and whether it is rented out. A second home is a personal residence for part of the year and may be rented out for the remainder of the year. If you rent out your second home for 14 days or fewer, the rental income is tax-free, and you can deduct mortgage interest and property taxes. If you rent it out for more than 14 days, you must report your rental income and allocate expenses between personal and rental use.
| Characteristics | Values |
|---|---|
| IRS definition | A dwelling unit with basic living accommodations, including a space for sleeping, cooking, and a bathroom. |
| Usage | If used for personal purposes, it is considered a residence. If rented out, it is considered a rental property. |
| Rental income | If rented for 14 days or fewer, the income is tax-free. If rented for more than 14 days, rental income must be reported. |
| Deductions | Mortgage interest, property taxes, and other rental expenses can be deducted. |
| Tax benefits | Second homes offer tax benefits, but these depend on usage and income from tenants. |
| Investment properties | If the second home is purchased solely for generating income, it is considered an investment property. |
| Selling | Selling a second home has different tax implications compared to a primary residence. Capital gains exclusions apply. |
| Distance from primary residence | Some lenders require a second home to be at least 50 miles from the primary residence. |
| Primary residence | If the second home becomes the primary residence for at least two years, it may qualify for a tax exemption upon sale. |
| Ownership status | Renting out a second home may affect how ownership is reported to the IRS. |
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What You'll Learn
Tax benefits and liabilities
The tax benefits and liabilities of a second home depend on how you use it. If you use it as a personal residence, a rental property, or a mix of both, the tax implications will vary.
If you use your second home as a personal residence, you can deduct mortgage interest and property taxes under the standard rules for a second home. You can also deduct a portion of your second home's mortgage interest and property taxes, just like you would with your primary residence. The IRS considers a property a second home if you visit it for at least 14 days per year or use it for at least 10% of the days that you rent it out. If you rent out your second home for 14 days or fewer in a year, the rental income is tax-free, and you can deduct mortgage interest and property taxes per second home rules.
If you rent out your second home for more than 14 days, you must report the rental income and allocate expenses between personal and rental use. You can deduct rental expenses, such as depreciation, maintenance, and property management fees. If you use the home as a residence and rent it out, you will need to report rental income and allocate expenses based on the percentage of personal and rental use.
Additionally, if you sell your second home, there are tax implications to consider. You can exclude up to $250,000 of the gain if it was your main home for at least two of the last five years before the sale. If you're married filing jointly, you can exclude up to $500,000. However, if you sold another home within the same two-year period or claimed the exclusion for that sale, you cannot claim this exclusion.
It is important to note that tax rules can be complex and may change over time. Therefore, it is always recommended to consult with a tax professional or financial advisor to understand the specific tax implications of your second home and ensure you are taking advantage of available tax breaks.
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Mortgage interest deductions
For tax purposes, a second home is considered a residence if it is used by the owner or their family for at least 14 days a year or is used at least 10% of the days that it is rented out. This distinction is important because it determines whether the property is considered a personal residence or a rental property for tax purposes, which has implications for mortgage interest deductions.
If a second home is rented out for 14 days or fewer during the year, it is considered a personal residence, and the owner can deduct mortgage interest under the same rules as a primary residence. This means that the owner can deduct mortgage interest on up to \$750,000 of mortgage debt ($375,000 if married and filing separately) for their primary and secondary residences combined. Additionally, for properties acquired before December 15, 2017, the limit is \$1 million ($500,000 if married and filing separately).
If a second home is rented out for more than 14 days a year, it is considered a rental property, and the owner must report rental income and allocate expenses between personal and rental use. In this case, the owner can still deduct mortgage interest, but it must be allocated between personal and rental use.
It is important to note that if a second home is used as a rental property, additional rules and limitations may apply to the deductibility of mortgage interest. For example, if the property is used as a residence and a rental, the owner may have to split their deductions between Schedule A and Schedule E on their tax return.
Furthermore, if the second home is used for personal purposes and rented out, the sale of the property must be treated as part personal and part business. In this case, the owner can exclude up to \$250,000 of the gain if the property was their main home for at least two of the last five years (\$500,000 if married and filing jointly).
Overall, while owning a second home can provide tax benefits, it is important to carefully consider how the property will be used and to understand the applicable tax rules to maximize deductions and comply with reporting requirements.
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Property tax deductions
The IRS considers a property to be a second home if the owner visits for at least 14 days per year or uses the home at least 10% of the days that they rent it out. If the owner rents out the property for fewer than 15 days a year, it is considered a personal residence, and they are eligible for itemized deductions like any other homeowner.
If you rent out your second home, tax filing can get complicated. The IRS has certain use guidelines that determine which tax reporting rules apply to a rented property. If you or your friends and family use the property for more than 14 days or a number of days equal to 10% or more of the time the property was rented during the year (whichever is greater), the property will be considered both a rental and a residence. In this case, you may have to split your deductions between Schedule A and Schedule E.
There are two main deductions available to homeowners:
- Mortgage interest: As a homeowner, you can deduct interest paid on up to $750,000 ($375,000 for married filing separately) in mortgage debt. This limit applies to your mortgage debt from your primary and secondary residences combined.
- Property taxes: You may also be able to deduct up to $10,000 for state and local taxes, including taxes on income and real estate taxes. This limit applies to the property taxes you pay on your primary residence and second home combined.
If you rent out your second home, additional rules may impact the deductibility of mortgage interest and real property taxes. For example, if you rent out your second home for profit, you can deduct the loss. The part of the gain you can attribute to depreciation is taxed at a maximum rate of 28%.
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Rental income and expenses
If you rent out your second home, you may be subject to the net investment income tax (NIIT). You can deduct certain expenses from your rental income, including mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation. These expenses will reduce the amount of rental income that is subject to tax.
If you use your second home for both rental and personal purposes, you must divide your total expenses between rental and personal use based on the number of days used for each purpose. You can deduct expenses up to the level of rental income you report. If your costs exceed your income, whether you can deduct the loss depends on how much you use the property yourself and your income level. In most cases, rental losses can be deducted up to $25,000 per year if personal use is limited to fewer than 15 days or 10% of the rental period.
If you rent out your second home for less than 14 or 15 days per year, you do not need to report the rental income to the IRS, and it is considered a personal residence. You can deduct mortgage interest and property taxes under the standard rules for a second home. You cannot deduct any rental expenses, such as advertising or cleaning costs.
If you rent out your second home for more than 14 or 15 days per year, you must report the rental income to the IRS, and it is considered a rental property. You can deduct rental expenses, but you need to allocate costs between the time the property is used for personal purposes and the time it is rented. You can deduct expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation.
It is important to note that the rules for rental income and expenses for a second home can be complicated and may vary depending on your specific situation and the location of your home. Consulting a financial or tax advisor can help you understand the tax implications and explore strategies for maximizing deductions and minimizing taxes.
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Investment properties
If you own an investment property, you must include all rental income in your gross income. This includes any amount received as rent, as well as advance rent, which must be included in your rental income in the year it is received.
As an investment property owner, you can claim various expenses as deductions, including:
- Interest on loans: The loan used to purchase, renovate, repair, or maintain the property is tax-deductible. Interest remains deductible if you refinance your loan for purposes directly related to the property. However, if part of the refinanced loan is used for personal expenses, only the portion related to the investment is deductible.
- Rental expenses: You can claim expenses such as mortgage interest, property tax, operating expenses, depreciation, repairs, advertising, maintenance, utilities, and insurance.
- Negative gearing: If your expenses exceed your rental income, you can offset the loss against other taxable income, reducing your overall tax liability.
It is important to maintain good records of your rental activities, including income and expenses. Proper documentation is essential if your return is selected for audit, and you may be subject to additional taxes and penalties if you cannot provide evidence to support your claims.
Consulting a tax professional is recommended when dealing with investment properties to ensure you maximize your deductions and comply with tax regulations.
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Frequently asked questions
A property is viewed as a second home by the IRS if you visit for at least 14 days per year or use the home at least 10% of the days that you rent it out. It must have basic living accommodations, including a space for sleeping, cooking, and a bathroom.
Renting out your second home can affect how you report ownership to the IRS. If you rent it out for less than 15 days a year, it’s considered a personal residence and you’re eligible for itemized deductions like any other homeowner. If you rent it out for more than 14 days, you will need to report your rental income, and expenses will need to be allocated between personal and rental use.
Like a primary residence, you can deduct a portion of your second home’s mortgage interest and property taxes. You may also be able to write off interest paid on a home equity loan.
If you used the home for personal purposes and rented it, you must treat the sale as part personal, part business. You can exclude up to $250,000 of the gain if the second home was your main home for at least two years in the last five years. If you’re married filing jointly, you can exclude up to $500,000.
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