Second Home Tax Tips
4 min read
September 12, 2017 • Block Advisors
Do you own a vacation home, rental property, a condo, or any other kind of second home? If you do, you probably have already realized your taxes are more complex than the average Joe’s.
Homeownership opens up the door to some tax benefits or relief, but it also means more work. Luckily second home tax breaks and deductions come in many forms – you just have to know how to spot and take advantage of them.
So, here are four of our favorite second home tax tips to help offset or reduce your overall tax bill:
1 – Itemize mortgage & prepaid interest, real estate tax, and qualifying expenses.
Did you know that only one in three taxpayers actually itemize tax deductions? If you don’t currently itemize deductions, you may be leaving money on the table. You can benefit greatly from it because home ownership offers some of the largest write-offs available.
- Mortgage Interest: The tax law allows you to deduct mortgage interest on up to two homes: a primary and secondary home.
- Real Estate Tax: Homeowners can also deduct real estate taxes for as many properties they own.
- Points: If you prepaid interest when you closed on your loan, you can deduct that interest in the year paid or over the life of the loan depending on certain factors.
- Qualifying Expenses: You can also deduct other qualifying expenses like personal property tax, state and local income taxes, and other miscellaneous expenses. Even if your expenses are small, they can accumulate to make a difference to your bottom line and are well worth extra record-keeping. For example, a taxpayer with a marginal tax rate of 25% could save up to $25 for every extra $100 they can itemize over the standard deduction.
2 – Understand tax rules associated with renting a second home.
With up and coming home swaps or rental opportunities, many second homeowners are drawn to renting their homes. While it’s an effective way to generate income, it creates more tax complexity.
- If you rent your second home, you could be taxed on your rental income either as a landlord (Schedule E) or as a self-employed person (Schedule C).
- If you reside or stay at the property during the year and rent it out for 14 days or fewer, you don’t have to report your rental income to the IRS. This offers a significant exception for hosts who can capitalize on short-term events in their area like major sporting, entertainment, or natural events. (Think Super Bowl or an eclipse.)
- If you provide “substantial services” — like cleaning, concierge services, tours, meals, entertainment or transportation — to your renters or guests, you would be self-employed, meaning you may have to pay self-employment tax of 15.3% in addition to income tax.
- If you didn’t occupy the second home during the year, you can generally deduct rental expenses. In addition to deducting the costs of mortgage interest, you can deduct costs for advertising, cleaning, depreciation, insurance, maintenance, repairs, real estate taxes, utilities, and other fees associated with renting the property. (But, like many tax deductions, they are subject to certain limitations. (Consult a tax advisor to see what you can deduct.)
3 – If you’re moving, look into the home sale exclusion.
If you currently own a second property but plan to sell it soon, you may qualify for the home sale exclusion if you previously used it as your main home. With this exclusion, the tax law doesn’t require you to pay capital gains on appreciation of your primary residence when you sell it if your profit is $250,000 or less. The exclusion is $500,000 for married couples filing a joint return. (Even so, you will likely not qualify for the maximum exclusion because your home was not your main home from the get-go.)
There are two ways your second home would appreciate: a good real estate market and home renovations.
Because home renovations increase your basis in your home, they can help reduce the amount of your sale proceeds counted as profit, and therefore it can reduce or eliminate capital gain tax.
Long story short: you can decrease your tax bill if you are able to decrease your gain. To do this, consider the cost of home improvements and selling expenses when figuring how much you gained.
4 – Get help from a trusted tax professional.
The right tax advisor will help make sense of the tax requirements and help you get the most out of a second home from a tax perspective. They can help you identify ways to lower your taxable income and claim all the tax benefits you’re entitled to. Look for someone who has lots of experience, especially in complex tax situations like self-employment, business ownership, and multi-property ownership.
Thanks for tuning into our post on second home tax tips. Second homeowners can learn more about deducting home mortgage interest, vacation home income, and more by talking to a trusted tax professional. Find a Block Advisors office near you today!