How will buying a vacation home affect my taxes?
Do you own a vacation home? Do you dream of purchasing or building a vacation home, maybe you’re considering buying a vacation home as an investment? Most people dream of owning a vacation home, the opportunity to escape to a beautiful location is always a tempting one. If you are considering buying a vacation home, you’ll find that the way you use your property will affect the way you file your taxes and even the types of tax deductions that are available to you.
A home that is purely used as a vacation residence will require different tax filings than a home that’s primarily used as a rental for tenants. If your house is intended for both personal use and as a rental property, you’ll want to be prepared to account for how much time is allocated to each type of use. Additionally, you will need the proper legal documents and agreements properly authored by a trusted attorney.
Personal use is the main reason to even consider a vacation home, but did you know that it can also make you money? Renting out the home often changes its classification under your state’s tax laws, so be sure to always keep that in mind. Generally speaking, if you occupy the home for personal use for at least 14 days or for 10% more than you rent it out for, you may still consider it as a personal second residence. If you decide to rent out your home for more than 14 days per year and your personal use does not balance this out, it may become classified as a rental property, which as mentioned above will most likely change its classification under your state’s tax laws.
If you use the house as a second home rather than renting it out as business property, interest on the mortgage will be deductible just as the interest on the mortgage of your first home is. You can write off all of the interest you pay, on up to $1.1 million of debt secured by your first and second homes that were used to acquire or improve the properties. (A total of $1.1 million of debt, not $1.1 million on each home.) For more info see IRS’s Publication 936 (2019), home mortgage interest deduction webpage (irs.gov/publications/p936)
From a tax perspective, the interest deduction is one in a list of many reasons you may wish to keep the home classified as a personal residence. Many complex rules still exist around what you can deduct and when, working with an experienced tax professional or attorney may help ensure that you manage your property in a way to maintain the benefits you prefer. If you do end up deciding to make your vacation home rental property, this may help it pay for itself. It is important to weigh the pros and cons carefully before making your final decision.
Renting out the place
Lots of second-home buyers rent out the property part of the year to get tenants to help pay the bills. As stated above, different tax rules apply depending on the breakdown between personal and rental use.
If you rent the place out for 14 or fewer days during the year, you may be able to keep the rental income tax-free. The house is considered a personal residence, so your deduction of mortgage interest and property taxes fall under the standard rules for a second home.
If you rent the place out for more than 14 days, then you must report all rental income, you also get to deduct rental expenses, and that gets complicated because you’ll need to allocate costs between the time the property is used for personal purposes, and the time it is rented.
Get help from an experienced legal team
The right legal team will help make sense of the tax requirements and help you get the most out of a vacation home from a tax perspective. The right legal team can also help you identify ways to lower your taxable income and claim all the tax benefits you’re entitled to. Look for a legal team that has lots of experience, especially in complex tax situations like self-employment, business ownership, and multi-property ownership, look for a team like Lubliner Law.
The attorneys at Lubliner Law are experts in drafting both long-term and short-term leases. These agreements can be intricate, specifying security deposits, payment terms, as well as define termination and early termination of the lease. We also can review your HOA or Condo docs, where applicable to ensure that the lease meets any community association regulations (including leasing duration and ensuring leasing is allowed, as some associations restrict leasing in the first year, for example). There are many obligations that a landlord assumes regarding maintaining the property, and we can ensure that your lease is crafted in a way that meets both the laws and your preferences and requirements of tenants.
Disclaimer: Lubliner Law can assist with the legal aspects of real estate contracts/transactions, but we always recommend consulting your tax advisor to advise you on your best legal course of action, as laws vary for each locale and may change from time to time.