Purchasing a second home can be an exciting endeavor, offering opportunities for both leisure and financial gains. However, it’s crucial to understand the distinct tax considerations associated with owning a second property. Let's explore the essential tax aspects every second home owner should be aware of.
Firstly, the distinction between a second home and an investment property is significant. A property is considered a second home if you use it yourself for part of the year; otherwise, it's classified as an investment property. Each category comes with different tax liabilities and benefits.
For a second home, mortgage interest is generally deductible if it conforms to the IRS guidelines. You can deduct interest on a loan of up to $750,000 for married couples filing jointly. It’s important to keep records of all deductions, as this can significantly affect your tax returns.
Property taxes for second homes are deductible as well, but they are subject to a cap. The Tax Cuts and Jobs Act of 2017 placed a limit on the combined state and local tax (SALT) deduction at $10,000, which includes property taxes.
If you decide to rent out your second home, different rules apply. You can rent it out for up to 14 days per year and pocket this rental income tax-free. However, if you rent it for more than 14 days, you must declare this as rental income, and different tax deductibility rules apply.
Capital gains tax is another critical consideration. When selling a second home, you could be liable for capital gains taxes on any profit made. Unlike your primary residence, you can't exclude gains of up to $250,000 (or $500,000 for married couples) from taxable income.
Owning a second home requires careful financial planning and understanding of tax obligations. Consulting a tax professional can be a wise step to ensure you take full advantage of any potential deductions while remaining compliant with tax laws.
