Are You Taking Advantage of Tax Breaks on Second Homes?

In the market for a second home or already own one? Well, congratulations. Now you can look forward to having a place to go for vacation and also receive some tax benefits while you are at the beach or hiking the mountains or wherever it is that you like to go.

Second homes break down into two categories: 

1. A secondary residence
2. A rental property

Secondary Residence

First, mortgage interest on a second home is deductible; but there is a cap. The combined mortgage debt on your first and second homes must not be greater than $1.1 million. If the combined debt is more than $1.1 million, interest on the debt beyond that amount is not deductible. That is not $1.1 million of interest, but is $1.1 million of debt.  At today’s market rate that would be about $44,000 to $55,000 worth of interest.

Second, property taxes are completely deductible and there is no cap on them. Nor is there a limit on the number of houses you may own. Mortgage interest can only be deductible on two houses subject to the cap mentioned about. Real Estate taxes can be deductible on as many houses as you would like to own.

Rental Property

What happens if you decide to buy another home and use it as a rental property? Rental properties fall into two other categories:

• Using the property 14 days or less
• Using the property more than 14 days

Renting the property 14 days or less

If you rent the property 14 days or less, the rules listed above regarding a secondary residence apply. Any rental monies you get for those 14 days or less, you can pocket for free. The IRS doesn’t care and no one is going to ask you about it. You can think of it as an offset to any maintenance expenses.

Renting the property more than 14 days

If you rent your place for more than 14 days, then it becomes subject to rental property laws:

If you rent a property totally for the year, everything in the house is deductible, including all maintenance, licenses, fees, management costs, etc. and, of course, interest and property taxes.

Also, renting for the whole year alleviates you from the burden of the mortgage cap mentioned above. And, if you rent out for the full year, you can have multiple rental properties and are not subject to the interest deduction limitation of $1.1 million in debt in the rental properties.

We broke rental properties into two categories – – renting the property 14 days or less or renting for the full year. There is another category. What if you use the property and rent it? In that case you have to allocate various expenses, which we will get into in another blog. Stay tuned!

Stephen J. Ganns, CPA
914-682-7007
steve@gannscpa.com
www.gannscpa.com

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