Tax breaks for a second home

Tax breaks for a second home make owning that pied-à-terre an excellent investment choice. If you are considering buying a second home for vacation, rental or investment, you need to understand today’s tax breaks and what they mean. Tax laws are complicated and constantly changing. Make sure you consult a qualified real estate agent to fully understand the tax laws. Here is a brief outline:
Personal Use
If the home is purely a vacation property (not a rental), 100% your mortgage interest can be deducted the same as your primary residence, up to $1.1 million for both homes. Property taxes can also be deducted. Since it is not a primary residence, you can’t write off things like utilities, upkeep or insurance, unless the second home is used for business.
Rental Use
There’s a 14-day rule that states as long as you rent it out for only two weeks, you don’t have to report the rental income. Plus, you can deduct mortgage interest and property taxes since the house is considered a personal residence. Renting the home for 15 days or more, the property is considered a rental and all income must be reported to the IRS. Up to $25,000 in losses are deductible, but keep the receipts to document the work. If you use the property for more than 14 days a year, or more than 10% of the time it is rented, it will be considered a personal residence so rental loss is not deductible.
Selling your second home
If you are considering selling your second home, keep in mind that tax laws allow a profit of up to $500,000. You may have to pay the usual capital gains, unless you make your second home your primary residence for at least two years prior to the sale. You’ll still owe taxes for the time the property was your second home.
1031 exchanges
This tax-deferred exchange has to do with sellers swapping rental or investment property. The seller can avoid having to pay capital gains but the property must be a rental, not a personal residence.
I keep up-to-date on all the tax ramifications for my clients who are considering purchasing a second home. Please call me at 805.886.9378 or via email at Cristal@montecito-estate.com. Be sure to check out my website for homes on the market in Montecito, Hope Ranch and Santa Barbara. Meantime, please LIKE my Facebook page!