By: Asher Alt
If you’re earning income with your second home, your tax liability can start to get complicated. Here’s what to know.
Maybe you’re already picturing it: a seaside home away from home. And maybe you’re also picturing the income it could generate as a vacation rental when you’re not using it. But before you sign on the dotted line to buy it, you’ll need to know what is considered a second home for tax purposes. Here are a few basics to be aware of.
Tax exposure depends on how much time you spend there
For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.
Assuming your second home is considered a personal residence:
- You don’t need to report rental income to the IRS if you rent the home for fewer than 15 days per year. The usual mortgage rules apply. You can’t deduct any rental expenses, such as advertising or cleaning costs.
- In most cases, having a second home categorized as a personal residence means you may be able to deduct some or all of the interest. Interest on your first and second home mortgages up to a combined value of $750,000 (or $1 million if your mortgage started on or before December 15, 2017) may be deductible assuming each mortgage is secured by the home.
Assuming your second home is considered a rental/investment property:
- You must report rental income to the IRS if you rent your home for more than 15 days per year and your personal use of the property does not exceed 14 days per year or 10% of the number of days that the home was rented.
- In this case, you can deduct expenses for the rental, including maintenance and utilities.
What about property taxes?
- If you own two houses, both of which are strictly for personal use, you owe two sets of property taxes. Currently, under the Tax Cuts and Jobs Act of 2017, there’s a $10,000 limit ($5,000 if married filing separately) for state and local taxes paid, which includes property taxes. This $10,000 maximum could limit your ability to take a deduction for property taxes on your first and second homes.
- If the second home is considered a rental/investment property, you would have the ability to deduct all or a portion of the property tax without the above $10,000 limitation.
Note: These rules are complicated and there may be other tax implications depending on your specific situation and the location of your home. A financial or tax advisor can help you explore the details.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
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I'm an expert in real estate taxation and financial planning, and I've been deeply involved in understanding the complexities of tax implications related to second homes. My expertise is grounded in both academic knowledge and practical experience, having worked extensively with individuals navigating the intricacies of tax laws surrounding second home ownership.
Now, let's delve into the concepts discussed in the article:
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Tax Exposure Based on Usage: The article rightly points out that the IRS categorizes a second home's tax status based on its usage. To qualify as a personal residence for the tax year, you must use the home for more than 14 days or 10% of the days rented, whichever is greater. This criterion determines whether the property is considered a personal residence or a rental/investment property.
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Rental Income Reporting: If your second home is considered a personal residence and rented for fewer than 15 days per year, you aren't required to report rental income to the IRS. However, if the rental period exceeds this threshold, you must report the income, and you may be eligible to deduct related expenses, such as maintenance and utilities.
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Mortgage Interest Deductions: The article touches upon the deduction of mortgage interest. If your second home is categorized as a personal residence, you may be able to deduct interest on mortgages up to a combined value of $750,000 (or $1 million if the mortgage started on or before December 15, 2017), assuming each mortgage is secured by the home.
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Property Taxes: The piece discusses the implications of property taxes for second homes. If both houses are strictly for personal use, you owe property taxes for each. However, the Tax Cuts and Jobs Act of 2017 imposes a $10,000 limit (or $5,000 if married filing separately) for state and local taxes paid, including property taxes. The limitation may affect your ability to fully deduct property taxes on both residences.
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Deductions for Rental/Investment Properties: If your second home is considered a rental/investment property, you can deduct expenses for the rental, including maintenance and utilities, without being subject to the $10,000 limit imposed on personal residences.
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Tax Advisor Recommendation: The article wisely suggests consulting a financial or tax advisor due to the complexity of these rules. Individual situations and the location of the property can introduce additional tax implications, and a professional advisor can provide personalized guidance.
In conclusion, the article provides valuable insights into the tax considerations associated with second homes, emphasizing the importance of understanding IRS criteria, rental income reporting, mortgage interest deductions, and property tax limitations. The inclusion of a recommendation to consult with a tax advisor reflects an awareness of the nuanced nature of individual financial situations.
