Your second home or vacation property can offer you significant tax advantages. Depending on how often you use your vacation home yourself, how often you rent it out, and how long it sits empty, you will fall into one of three different tax categories.
The first area includes homes that are rented out often but that are still used often by the owner. Specifically, this applies to homes that are rented more than 14 days a year and have personal use of more than 14 days or 10% of the rental days, whichever is greater. Personal use includes use by family members and anyone else who pays less than market rental rates.
Vacation homes fitting this description are considered personal residences. This helps you, because you can deduct interest on up to $1 million of mortgage debt on two personal residences and up to an additional $100,000 for home equity loans. Property taxes are generally deductible, no matter how many homes you own.
The second vacation-home tax category typically applies to houses that are used very little by the owner. Your home will fall under the tax rules for rental properties rather than for personal residences if you rent more than 14 days a year and if your personal use doesn’t exceed 14 days or 10% of the rental days, whichever is greater. Interest, property taxes and operating expenses will all be allocated based on the total number of days the house was used.
The final category is a rarity in the tax laws: It is simple and benefits the taxpayer. This one applies to homes that are rented for fewer than 15 days a year and used by the owner for more than 14 days. These homes are considered personal residences, so you simply deduct the interest and property taxes the same as you would for your primary residence. You need not declare a penny of the income.
When buying a second/vacation home, interest is fully deductible. In fact, your additional property doesn’t have to strictly be a house. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities. You can even rent out your second property for part of the year and still take full advantage of the mortgage interest deduction as long as you also spend some time there.
Be careful. If you don’t vacation at least 14 days at your second property, or more than 10 percent of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and cut your interest deduction.
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