Second Home Tax Benefits You Should Know | Pacaso | Pacaso

Top tax benefits to owning a second home

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Kasey Tross

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Before deciding on the purchase of a second home, it’s nice to know how owning a second property could impact your taxes. There are many second home tax benefits to consider, but they’ll vary based on how the IRS classifies the property  – as a second home, an investment property, or a little of both. Here are the main differences: A second home
  • Is occupied by the owner at least 14 days out of the year
  • Is rented to others 14 days or fewer out of the year
An investment property
  • Is occupied by the owner fewer than 14 days out of the year
  • Is rented to others more than 14 days out of the year
A mixed-use property
  • Is occupied by the owner more than 14 days out of the year
  • Is rented to others more than 14 days out of the year

Second home tax benefits

As long as you occupy your second home for more than 14 days a year, you may qualify for these second home tax benefits: Mortgage interest deductionSingle filers and married couples filing jointly can deduct up to a total of $750,000 of mortgage interest from all properties they own, including a principal residence and their second homes. But this is subject to change in 2025, when the Tax Cuts and Jobs Act is scheduled to expire. Property tax deductionYou can deduct property taxes on all the properties you own, with a maximum deduction of up to $10,000 per tax return. Keep in mind that this is included in the deduction for state and local income taxes (SALT), so you might reach that $10,000 quickly with your principal residence and be unable to deduct property taxes from a second home.Tax-free rental incomeThe IRS does not require you to report any rental income you receive from renting out your second home if you rent it out 14 or fewer days each year. Some second home owners choose to rent out their second home for two weeks each year so they can use the tax-free income to offset maintenance costs or property taxes on a second home. Home equity loan interest deductionIf you take out a home equity loan or home equity line of credit (HELOC) on your second home and you use the money for home improvements on that property, you can deduct the amount in interest you paid on that loan from your taxable income for the year. Saving all your home maintenance receipts will provide evidence for this deduction if needed.

Investment (rental) property tax benefits

The IRS requires you to report any income generated from a second home if you rented it out for more than 14 days out of the year. Its rental property status may qualify you for these investment property income tax benefits: Rental expense deductionRental expenses include maintenance, property management fees, mortgage interest, property taxes, pest control, HOA fees and more. These are all considered operating expenses for you to maintain a rental property and, as such, they are deductible from the income you receive from the property. Depreciation deductionOwners of rental properties are allowed a depreciation deduction to help you recoup money lost in the building through normal wear and tear over time. The deduction is based on the value of the building alone (not the land that it sits on). Divide the building’s value by 27.5 years to approximate your annual depreciation deduction. Loss deductionIf the annual income from your investment/rental property falls short of the amount you spent to maintain it during the year, you may be able to deduct the loss (up to $25,000) on your income taxes, depending on your adjusted gross income (AGI). 

Taxes for a mixed-use property

If you’re occupying your home for part of the year and renting it out for another part of the year, the tax rules of both second homes and investment properties will apply to you, based off of the ratio of time the home is used by you vs. the time it’s been rented out.For example, let’s say you used your second home for 30 days out of the year, and you rented it out for 70 days. (The other 265 days it was unoccupied.) In that case, 30% of your financial activity related to the home would be subject to second home tax rules, while 70% would be subject to investment property tax rules. (It’s a lot like the difference between taking your family out to eat vs. taking a client out to eat – one would be considered a non-deductible personal expense, while the other could be considered a tax-deductible business expense.)

The bottom line

Many second home tax benefits are similar to those of a primary residence, but depending on how you use the property, you may be able to claim a few additional perks as well. Be sure to consult a licensed tax professional to better understand how second home tax rules might affect you come tax time. 

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