Understanding Second Homes and Property Taxes
You can see it now — your family is relaxing at your very own vacation house. Or maybe you’re dreaming of rental income rolling in?
There are lots of ways to use a second home. But before you make the investment, you’ll probably want to find out more about the tax situation.
For instance, are property taxes higher on a second home?
Keep reading to find the answer to this question and more, including factors that will impact your tax returns and how property taxes work in Washington and Oregon.
Table of Contents
- How Does a Second Home Affect Taxes?
- 3 Factors That Will Impact Your Tax Return With a Second Home
- Are Property Taxes Higher on a Second Home?
- Property Taxes on a Second Home in Washington
- Property Taxes on a Second Home in Oregon
- Let PEGGY HOAG REAL ESTATE Help Make Your Second Home Buying or Selling Process Easy
How Does a Second Home Affect Taxes?
If you want to buy a second home in Oregon or Washington, one of the first things you’ll want to know is how it will affect your taxes. The answer depends on how you will use the property.
If you plan to live in your second home, mortgage interest is deductible within the same limits as your primary residence. The same is true of property taxes.
If you bought an additional house with the intent to rent it out, the rules are a little different. If you rent out the property for more than a total of two weeks of the entire year, you may deduct all rental expenses from your taxes. But you may not deduct mortgage interest and property taxes like you can with a second home that is considered a residence.
If you rent your second property for two weeks or less per year, you do not have to claim any rental income on your taxes and can still deduct mortgage interest and property taxes.
3 Factors That Will Impact Your Tax Return With a Second Home
If you’re planning to buy a second home, you need to know what tax deductions you’ll be able to claim to make the most of your situation. Here’s a breakdown of what you may be able to do based on your situation.
#1: Mortgage Interest
If your second home …
- Was purchased before December 16, 2017
- Is primarily for personal use; and
- Isn’t a rental or business property
… then you can deduct the mortgage interest on it just as you would with your first house.
You can write off up to 100% of the interest paid on up to $750,000 of debt. This amount drops to $375,000 if you are married and filing separately.
If you are deducting mortgage interest from a home debt that occurred before December 16, 2017, higher limitations apply — you may deduct $1 million or $500,000 if married and filing separately.
#2: Property Taxes
You are allowed to deduct property taxes on your second home — and any other property you own. But the Tax Cuts and Job Act (TCJA) of 2017 created changes that affect the deductions you’re allowed to make.
You used to be able to deduct 100% of property taxes paid on real estate you own. But now your total state and local tax (SALT) deductions, which include property and income taxes, are limited.
The new maximum amount you may deduct is $10,000 per return, or $5,000 if married and filing separately.
Since most people reach that limit with their first home, they won’t see any additional tax savings from their second.
#3: Rental Status/Second Home Use
If you decide to rent out your second home rather than using it as a secondary residence, different tax laws apply based on the specific residential rental status. The IRS divides this situation into three categories:
- Properties you use more than rent — As we said before, if you rent out your second home for two weeks or less per year, you may keep all of the rental income tax-free and can deduct mortgage interest and property taxes just as you would with your first home. You may not deduct any rental-related expenses in this situation.
- Properties you rent more than use — For homes that you rent out more than two weeks per year, it is considered an investment property. You may not deduct mortgage interest and property taxes in this situation. You are allowed to deduct all rental expenses including things like maintenance and property management.
- Properties you rent and use equally — In this case, you may no longer claim your second home as an investment property, but you’re still allowed to deduct mortgage interest, property taxes, and rental expenses up to the level of rental income only.
Are Property Taxes Higher on a Second Home?
Although property taxes are not technically higher on a second home, you will probably end up having to pay more of the total taxes on that home than you would your primary residence. This is because of the changes we discussed earlier with the TCJA.
As a reminder, this law says you may only deduct a maximum of $10,000 in property and local taxes paid. Most people hit this limit with their first home and thus are not able to deduct state and local taxes on their second home.
Another thing we can take a look at is how much tax you will pay when you sell your second property. If your second home is considered an investment property, it will be taxed at capital gains rates, which can be quite high.
Compare this to the sale of your primary home, where the tax laws allow you to exclude a profit of $250,000 if you’re single and $500,000 if you’re married and filing jointly. So in this way, you do end up paying more taxes on your second home.
Property Taxes on a Second Home in Washington
Just like with a primary residence, property tax rates on second homes in Washington vary and are determined by many factors.
The three main things that determine the tax rate are:
- Combinations of taxing districts in different counties
- Budgets for each tasking district; and
- Voter-approved bonds and special levies
You can calculate the amount of tax you will pay if you know your tax levy rate and the assessed value of your property. For instance, if the assessed value of your property is $500,000 and the levy rate is $9.41 per thousand dollars of value, your tax amount will be $4705.
Property Taxes on a Second Home in Oregon
Property taxes on a second home in Oregon are determined similarly to Washington taxes: property taxes are determined as the rate per $1,000 of assessed value.
The Oregon Legislature recently proposed Senate Bill 852, which would decrease tax breaks on second homes. But don’t let this discourage you if you’re thinking of purchasing another house. Your realtor can make recommendations on how you’ll get the most deductions out of your situation.
Let PEGGY HOAG REAL ESTATE Help Make Your Second Home Buying or Selling Process Easy
At PEGGY HOAG REAL ESTATE, we have been helping clients find their dream homes in Oregon and Washington for decades.
Whether you’re looking for a second home to rent out or enjoy with your family — or your first house ever — we will guide you through every step of the way and help you find something just right for you.
Contact us today to see our available properties and get started on your real estate journey.