Understanding the Tax Advantages of Owning a Second Home

Published: 07th December 2009
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Maybe you have already heard that by owning a second home you can get some tax advantages - and this is true. There are rules and regulation for some special tax that applies to second properties, but the guidelines may be a little obscure. In this article we walk you through it for better understanding.

To find out the kind of tax break you can avail as related to your vacation home, you have to determine your purpose of using the property, and in what category the Internal Revenue Service will place it. Your vacation home will be considered as a residential home if you plan to use it for personal use and spend at least 14 days there, or ten percent of the total days that the property is rented. This will enable you to deduct mortgage interest on your vacation home of about a million dollars on both your private property an as much as a hundred dollars more for home equity. This is because of what line 10 of Schedule A say about deductible property taxes, regardless of the number you have.

On the other hand, you may want to run your second home as rental property. That means you rent out the property for more than fourteen days a year and does not use or stay there for more than fourteen days or more than ten percent of the amount of time of rental days. You will be required to declare the rental income, and minus the operation expenses during the rental period which include maintenance, management fees, upkeep, advertising, insurance, mortgage interest, devaluation, and taxes. Bear in mind, though, that if your vacation home is categorized as a rental property, your expenses could not be larger than the income.

In the case you rent your own vacation home for less than two weeks, you can avail a tax break because there is no need for you to declare the rental income on your tax return. The whole rental income is, basically, tax free.

Do not forget that your interest is always completely deductible when buying a second home. In addition, the second home is not always a strict asset planted on the ground as it could be any asset, recreational vehicle, or a house boat on the condition that it has all the requirements of the Internal Revenue Service to be considered as a house.

In short, try to keep these three simple rules in mind when thinking about possible tax advantages of owning a vacation home:

• All your expenditures are deductible against the rent, if you do not use the property.

• The rent you get does not have to be reported on your tax return if you rent the property for less than 14 days a year

• Your expenditures are prorated against your income if you use the property for more than 14 days a year.

You can capitalize on these tax breaks when you own a second home. You should take this chance particularly during these economically problematic days. Tax breaks should not be the only reason you think of buying a second home. Hopefully, there are other ways you can enjoy it, too.

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