Table of Contents
How Does Buying a Second Home Affect Taxes?
Are you buying a second home or a vacation home? If so, you need to know how buying a second home affects taxes. Depending on the purpose of your second home, you could have drastically different tax implications to deal with. Many people who own a lake or beach home and will sometimes rent the property out when they aren’t using it. Whether you rent the home out all the time or for just a few weekends in the summer, there are important tax rules to claiming that rental income and what deductions you can take. Here is what you need to know about owning and paying taxes on a second home.
Not Renting the Home?
How does owning a second home affect taxes? To determine how the government taxes for your second home, it’s important to distinguish between personal use and rented use:
- Personal use: Personal use of a dwelling occurs when someone such as the owner or a family member uses the property and does not pay a fair rental price for its use.
- Rented use: Rented use of a dwelling occurs when someone uses the property and pays a fair rental price for its use. A fair rental price is defined as a price that someone unrelated to the owner would be willing to pay.
If you never rent your second home out, then it is considered your personal residence. This means you will get the same tax benefits as you will for your first home.
How Taxes Work With Two Homes for Personal Use
When it comes to your real estate property taxes on a second personal residence, you can itemize and make deductions from both homes. Note, this is capped at $10,000, no matter how many homes you have.
If you’re taking a mortgage to buy your second home, you can deduct the interest you pay on up to $750,000 of the mortgage debt you used to purchase your first and second properties or to improve the homes. A tax attorney from Polston Tax can help you determine how you can itemize and how much you can deduct on your taxes.
Renting Out the Home
If you decide to rent the home out, you can face different tax implications depending on how long you rent it out. If you rent the home out for 14 days or less, you do not have to report that income to the IRS. Along with not claiming the income, you also can’t deduct any expenses related to the renting or claim a rental loss. Your home is still considered a personal residence at that point.
If you rent it out more than 14 days, then that property is going to most likely be considered a rental home. The rule the IRS goes by is if you use the house for 14 days or 10% of the number of days you rent it out, it’s a rental property. If you’re unsure whether you have a rental property or a personal property, you can ask a tax attorney from Polston Tax.
How a Rental Property Affects Your Taxes
If it is considered a rental property, you will have to report any rental income you receive to the IRS. Rental income is considered any payment you receive for the use or occupation of the property. You can also deduct rental expenses. Rental expenses include normal residence deductions like mortgage interest and property taxes but also expenses such as:
- Utilities
- Depreciation
- Repairs
- Insurance
- Property managers
You can also claim losses on your rental property if you qualify. If you have a rental property, speak with a tax attorney at Polston Tax and have them help you through the process to ensure everything is handled correctly.
Learn More About How a Second House Affects Taxes
Figuring out your taxes can be challenging, especially if you are a homeowner with multiple properties. But you don’t have to figure out your taxes alone. At Polston Tax, we offer accounting and bookkeeping services and tax resolution services. Since 2001, we have been providing our clients with tax and financial services, and we can help you with:
- Advanced tax planning
- Tax return preparation
- Bank levies
- Lien assistance
- Penalty abatements
- Audit representation
- State tax representation
- Tax court representation
- Sales tax representation
- Payroll tax representation
- IRS account investigation
- Revenue officer assistance
- Wage levies or garnishments
Our team includes top tax attorneys with extensive experience resolving state tax and IRS issues, assisting with audits, preparing tax returns and lowering or completely eliminating wage garnishments and liens. If you are looking for tax resolution services, our process involves an initial consultation, meeting with a strategist, conducting a financial analysis, discussing your options and plan implementation.
Contact us at Polston Tax to learn more about second home vs. investment property tax benefits.
Additional Readings
As a business owner, you know everything there is to know about your industry. You could be an expert on your specific business, but how much do you know about business taxes? If you are like other business owners, you might not know a lot. Luckily, there are professionals who can guide you through the basic and specific tax...
If your loved one recently passed away, you may have many questions about filing income tax for them. Perhaps the most important thing is to understand that you are not alone. Dealing with a deceased’s unpaid taxes can be challenging. For example, who is responsible for paying taxes when someone dies? Do IRS debts go...
If you have a tax balance with the IRS, you may be wondering if you can get a passport. While having your passport renewal denied or revoked is a possibility, it depends on the amount you owe the IRS. If your taxes become seriously delinquent, the IRS can take action against you, leading to the...
Most employers in the United States completely shut down or suspended operations during the COVID-19 pandemic. To help such businesses, the federal government implemented various policies, including the Employee Retention Tax Credit (ERTC) or Employee Retention Credit (ERC) program. However, it can take the IRS months to process claims because of the number of applications the...
If you’re a small business owner, you’ve probably heard about sales tax. Knowing how to collect, record and remit sales tax can be complicated, especially as your business grows. Keeping up with changing tax regulations can also be challenging. Paying sales tax for your small business is essential because failing to do so can result...
The Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit (ERTC), will unveil some major changes at the start of 2024. Starting in September of 2023, the IRS Commissioner placed a moratorium on new ERC applications through the end of the year, giving the IRS time to update its guidelines and develop a new...