Are you buying a second home or a vacation home? Depending on the purpose of that second home, you could have drastically different tax implications to deal with. A lot of people own a lake or beach home and will sometimes rent it out when they aren’t using it. Whether you rent it out all the time or for just a few weekends for summer, there are important tax rules to claiming that rental income and what deductions you can claim. Here is what you need to know about owning a second home.
Not Renting the Home?
If you never rent the second home out, then it is considered your personal residence. This means you will get the same tax benefits as your first home. With owning a second personal residence, you can itemize and deduct the real estate property taxes from both your primary residence and your second home. Note, this is capped at $10,000, no matter how many homes you have. If you’re taking a mortgage to buy the second home, you can deduct the interest on up to $750,000 of mortgage debt used to acquire your first and second homes or to improve the homes.
Renting the Home Out
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 be most likely considered a rental home. The rule the IRS goes by is if you use the house for fewer than 14 days or less than 10% of the number of days you rent it out, it’s a rental property. 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 like utilities, depreciation, repairs, insurance, and property managers. You can also claim losses on your rental property if you qualify. You can learn about what the IRS considers rental income and what deductions you can take here.
