A Guide to Second Home Tax Deductions: What You Should Know to Save More Money
Buying a second home can be exciting. Not only is it a great investment, but it can also earn you some tax write-offs.
But, before you sign on the dotted line, you should know that how you use your second home will determine which information must be included in your taxes.
Whether it’s for …
- Income purposes
- Vacation use; or
- Eventual retirement
… this guide explains second home tax deductions you can claim and gives you insight into purchasing or selling a second home.
Table of Contents
- 4 Tax Write-Offs That May Be Available to You
- #1: Mortgage Interest Deduction for a Personal Residence
- #2: Mortgage Interest Deduction for a Rental Property
- #3: Home Equity Loan Interest Deduction
- #4: Property Tax Deduction
- What Expenses Are Deductible When Selling a Second Home?
- PEGGY HOAG REAL ESTATE the Experienced Resource to Help You Buy or Sell Your Second Home
4 Tax Write-Offs That May Be Available to You
Knowing that you can reduce the overall expense of owning a second home is a major motivator for many people to invest.
Claiming tax deductions for …
- Property taxes
- Mortgage interest; and
- Rental expenses
… can significantly lower ownership costs. And even though the Tax Cuts and Jobs Act (TCJA) reduced some deductions, such as how much mortgage interest you can deduct, many tax breaks still exist for homebuyers looking for a second home.
Understanding second home tax deductions can add a lot of stress to an exciting purchase. The expert realtors at PEGGY HOAG REAL ESTATE can help you through the process when buying your first or second home in Oregon or Washington.
You don’t need to go into the purchase feeling unsure, we’re here to help. Give us a call at Peggy Hoag Real Estate with any questions you have about second home tax benefits.
In the meantime, here are a few of the key deductions that you’ll want to be aware of.
#1: Mortgage Interest Deduction for a Personal Residence
For many years, homeowners were able to deduct their mortgage interest on personal residences up to $1 million of mortgage debt.
However, the TCJA, signed into law in 2017, reduced the amount homeowners can deduct for mortgage interest for both primary and secondary residences to $750,000 on homes purchased after December 17, 2017. The limit is $375,000 if you’re married but filing separately.
If you own a home purchased before the TCJA took effect, you can still deduct for mortgage interest up to $1 million in debt.
To qualify for this deduction, the mortgage must be considered a secure debt on a home you own, whether it’s your first or second home. It can be any type of residence that has basic living accommodations, such as toilets, cooking facilities, etc.
#2: Mortgage Interest Deduction for a Rental Property
Can a second home be a tax deduction if it’s a rental? It sure can, but it’s slightly more complicated when it comes to breaking down personal use vs. rental use.
When the IRS views your second home as an investment property, you can’t personally deduct the mortgage interest. However, as a business, you can deduct it as a business expense.
Below are the three categories under which your rental property may fall.
Properties You Rent More Than Use
When you rent out a property more than you use it for yourself, it can be considered an investment property.
If you rent your second home for 15 days or fewer within a year, the IRS will let you keep the income tax-free.
However, renting out your home for more than 14 days requires you to report it on your taxes.
You can itemize and deduct expenses related to your rental, such as:
- Rental expenses
- Property management
Properties You Use More Than Rent
When using your second home as a personal residence, you cannot deduct rental-related expenses unless the home is rented for more than 14 days out of the tax year.
However, you can deduct your mortgage interest and property taxes just as you would with your primary residence. Additionally, when you sell the home, it will be treated as a personal residence rather than an investment property.
Properties You Rent and Use Equally
Even if you rent your home equal to the number of days you use it personally, you cannot claim it as an investment property.
If you rent it for more than 14 days per year, you can deduct both mortgage interest and property taxes, as well as rental expenses. However, rental expenses can only be claimed up to the level of rental income, which means you can’t claim rental losses.
#3: Home Equity Loan Interest Deduction
According to the new rules of the TCJA, you can deduct interest on a home equity debt when the funds are used to …
- Build; or
- Substantially improve
… the home that was used to secure the loan.
Based on this new rule, to deduct interest on a second home, you must have a mortgage on it. If you’ve borrowed against your current home’s equity to finance your second home, then you cannot deduct the interest.
Similar to a mortgage, deductions are allowed up to $750,000 in home equity debt if you are married, or $375,000 if you are married but filing separately.
#4: Property Tax Deduction
Second home income tax deductions for property taxes are allowed, but the TCJA has also made changes that affect those deductions.
The total amount of state and local tax (SALT), including income and property tax, for all properties owned, is limited to $10,000 per tax return, or $5,000 if you’re married but filing separately.
Unfortunately, many people exceed that limit with their first home, so they may not get second home tax deductions for property taxes.
What Expenses Are Deductible When Selling a Second Home?
However, if you make your second home your primary residence then you may be able to lessen the hit on capital gains taxes — but you must live in that home for two out of the five years before selling.
Additionally, you must not have taken a capital gains exclusion on the sale of any other home in the previous two years.
PEGGY HOAG REAL ESTATE 30+ Years Experience Helping People Buy and Sell a Second Home
Whether you’re buying or selling your first or second home, you’ll want an expert by your side.
Peggy Hoag Real Estate brings over 30 years of experience in luxury, vacation, and second home real estate and we can help you navigate the ins and outs of your purchase — including how to understand complicated vacation or second home tax deductions.
Right now, the markets in Oregon and Washington are hot when it comes to buying investment, retirement, or vacation properties. The time to buy — or sell — is now.
Don’t get caught up in the red tape of bureaucracy; let our team guide you through the entire process.
Give us a call today.