Many homeowners look forward to purchasing a second home that can be used for vacations, rental income, investment purposes or as a primary residence during retirement. Current tax laws offer several tax breaks that can help make second-home ownership more affordable. If you already own, or are thinking about purchasing a second home, it will be in your best interest to understand the tax breaks and how they work. Different tax rules apply depending on how you use the property, for either personal or rental use, or a combination of the two.
As long as you use the property as a second home – and not as a rental – you can deduct mortgage interest the same way you would for your primary home. You can deduct up to 100% of the interest you pay on up to $1.1 million of debt that is secured by your first and second homes (that’s the total amount – it’s not $1.1 million for each home). When shopping for your second property use a tool like a mortgage calculator to research interest rates before you make your big purchase.
Note: You can also deduct property taxes on your second home and, for that matter, as many properties as you own. Like a primary residence, however, you generally can’t write off any of the costs associated with utilities, upkeep or insurance (there are exceptions to this; for example, you may be able to claim a home office deduction if part of your home is used for business purposes).
Rental Use – The 14-Day or 10% Rule
The tax rules are quite a bit more complicated if you rent out the property. Different rules apply, depending on how many days a year you use the home for personal versus rental use. There are three categories into which you may fall: Continue reading…