If you have purchased a vacation home for personal use or to generate rental income, your taxes are more complex than those of single-home owners. Ferguson Timar’s experienced team will help you properly account for your second home on your tax forms while minimizing your tax liability to the greatest possible extent.
Together, we’ll make the most out of your tax obligations tied to your second home investment by utilizing all applicable deductions and adequately assessing whether you should classify the home as a personal residence or rental property.
Is Your Vacation Home a Personal Residence?
If you rent your vacation home for 14 days during the tax year, you are not required to report any rental income you have made. If your vacation home meets this criterion, it’s likely considered a personal residence. The only exception to this rule applies if personal use of the property does not exceed the greater of either 14 days or 10 percent of the days that you choose to rent it out.
Taking Advantage of Available Tax Deductions
If you classify your home as a personal residence, you may deduct mortgage interest on your property in re: loans up to $750,000 (or $1 million if you took your home loan out before Dec. 16, 2017). Note that this amount applies to single and married filing jointly filers. Alternatively, those who are married filing separately may only deduct interest on loans up to $375,000. You may also take the SALT deduction for up to $10,000 in state and local property taxes levied against your primary residences. If you exceed this limit for your first home, you cannot take any additional deduction for your second home.
Suppose you have taken out a home equity loan or HELOC on your property (and it is considered to be a personal residence). In that case, you could deduct the interest for this loan or line of credit if you used the advance to “buy, build, or substantially improve” upon the property. However, if you use the loan for other purposes, you cannot take this deduction.
If you sold your second home during the tax year—and is considered a primary residence—you can exclude up to $500,000 in capital gains from your income if you are married and filing jointly, or up to $250,000 otherwise. This deduction only applies if you lived in this property for two of the last five years before the sale took place and have not claimed this exclusion for the sale of a different residence during the last two tax years. If not, your non-primary residence or investment property is subject to capital gains taxation on the entire profit of the sale. However, if your vacation home is a business or investment property, you may be able to defer your capital gains liability per a 1031 exchange. Tax deductions are a complicated business, so you’ll want to connect with our team to learn more if you might be eligible for this opportunity.
Special Considerations if You Rent Out Your Vacation Home
Whether you rent your vacation home year-round, list it as a short-term vacation rental on Airbnb or Vrbo, or rent it out to loved ones, take extra care with your taxes. Any second home not classified as a personal residence is subject to special tax regulations.
Keep in mind that you must report rental income related to your vacation home if you rent it out for more than 14 days in a tax year. Failure to report this income is tax fraud.
You may not deduct mortgage interest for investment properties, but you can deduct expenses associated with maintenance, operations, and property ownership. You can also deduct property depreciation as a rental expense. On the other hand, if you rent your property sometimes and benefit from personal use at other times, divide your expenses between the amount of time the property is utilized for one purpose or the other.
Seek Personalized Tax Guidance Today
Proactive tax planning ensures that your overall liability for the previous tax year and current calendar year is minimized to the greatest possible extent.
The experienced team at Ferguson Timar can assist you with all of your business and personal tax preparation and planning needs. Connect with us today to get started.