Buying a second home could give you great tax advantages. It does not matter whether your home has a ground foundation or built with wheels, just as long as a person can reside in it, the opportunity stands. Learning about them could help you reap savings in obtaining your second home. However, the application is dependent on how the property will be used.
Before you decide on what to do with the property, it is best to consult a tax advisor or an accountant. But to give you an idea on how it should work, read on for further discussions.
Buying a Second Home for Personal Use
People get a second home to use it as a holiday getaway or a vacation home. It may be obtained from another state or within the same city. No matter where it is located, tax benefits for this use will be attributed to its deductions. Here are some of the allowable deductions:
• 100% value of the mortgage interest paid for a home acquisition debt of 1.1 million is deductible.
• All kinds of property taxes are an outright deductible regardless of how many homes you have.
• Mortgage points may not be deducted outright but it is deductible over the life of the loan.
• Casualty and theft losses can also be deducted.
Buying a Second Home to Venture on Rental Business
Second homes may be used as a rental property. Tax benefits in this category would vary according to the number of days it was used for rental. Here is how you can get them:
1. If the property was rented out less than 14 days per year, you do not have to declare the income received (even if you earned more than a thousand dollars). That is instant tax-free income going straight to your pocket! Moreover, you get to use the allowable deductions for personal use.
2. If the house was rented more than 14 days annually, you will have to disclose the income received. However, since this qualifies as used for business, you can deduct operating expenses like advertising, travel, insurance, repairs and many others. Mortgage interests, points and fees will also be deductible with a limit of 1.1 million total home acquisition debts.
3. If the house was used for both personal and rental use, the expenses must be subjected to pro-ration.
Capital Gains and Application of losses from Rentals
Tax advantages upon selling of second homes can be obtained only if you declare the house as your primary residence (for at least two years prior to disposal). Prior 2008, exemption from capital gains amounted to 500,000 dollars. However, it was changed. Presently, whether you were able to declare your second home as a main home prior to selling, your house will be subjected to capital gains tax (but only a percentage of the income received).
If the property is considered a rental property, an amount of $25,000 can be claimed as a loss. However, limitations will be based on your adjusted gross income. It should be less than $100,000 to be qualified for such claim. However, if the adjusted gross income exceeds the limit, chances are the deductible loss will be forfeited but can be carried out upon sale of the property.
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