If you’re considering buying a vacation home this year, you’re far from alone. Some 1.1 million were sold nationwide in 2014 — the most recorded since 2003, representing a 57 percent jump over 2013.
Before joining the bandwagon, consider these tax implications:
- If the real estate property is your second home intended for your own use, you may deduct the mortgage interest paid. The home is classified as a rental, however, and potentially eligible for more deductions if you rent it for 15 days or more annually and use it yourself fewer than 15 days or 10 percent of the rental days, if greater.
- You may deduct 100 percent of the interest paid on up to $1.1 million of combined mortgage debt for your first and second homes, given they’re not used as rentals.
- You may deduct property taxes on as many properties as you own.
- For an owner-occupied second home, deductions don’t apply to utilities, insurance or maintenance. For a rental, deductions may include rental fees, mortgage interest, property taxes, insurance premiums, property manager fees, utilities and depreciation, pro-rated depending on any owner use.
- Regardless of rental fees, if you rent out the property for 14 nights or fewer per year you need not report the income to the IRS. Longer-term rental income is subject to taxation.
- If you sell your second home, the revenue is subject to capital gains tax (reduced if the home was your primary residence for two of five years prior to the sale).
Since tax laws are complicated and often change, always consult with qualified real estate tax specialists when contemplating ownership of a second home.
To learn more about the tax implications of buying a vacation home, contact a Boulay advisor at 952-893-9320 or learnmore@BoulayGroup.com.
File Download: Mulling that Vacation Home? Take a Closer Look