If you’re thinking about buying a second home, such as a vacation home, be aware that doing your taxes will be a little trickier than it is on your primary home. For example, make sure that you’re aware of all of the tax breaks that are available so that you can take advantage of certain deductions. The following are three useful tips you’ll want to keep in mind at tax time regarding your second home:
1. Itemize Your Tax Deductions
Itemizing your deductions is an effective way to save money on your taxes, yet many people take the standardized deduction instead. In fact, it’s estimated that only a third of all taxpayers actually itemize their deductions. As a homeowner, you will benefit even more from itemizing your deductions since some of the biggest tax write-offs available are those that have to do with homeownership. The following are just three examples of things you can write off on your second home taxes that could save you a significant amount of money:
When you buy a house, you’ll likely take out a home mortgage in order to so (not many people can afford to buy property without the help of a loan). When you take out a mortgage, you’ll have to pay interest. Depending on how much your house cost, the duration of the loan, and the interest rate of your mortgage, you could spend tens of thousands of dollars on interest over the long run. Fortunately, you can write off your mortgage interest. In fact, you can write off the mortgage interest on up to two homes.
Real Estate Tax
Real estate taxes, also known as property taxes, are charged by the local government where your property is located. The real estate tax rate varies from place to place, often somewhere between 1 and 2 percent. This means that real estate taxes commonly cost thousands of dollars a year. Fortunately, you can deduct the real estate taxes for all the properties that you pay for.
Mortgage interest and real estate taxes aren’t the only homeownership expenses that you can write off. There are a number of other expenses that qualify for tax deductions or tax credits that include the following:
Personal property tax
Modifications to improve safety and accessibility for someone living in the second home.
Home improvements that improve energy efficiency.
Rental expenses, such as renovations, cleaning, maintenance, repairs, utilities, depreciation, and advertising.
2. Utilizing Your Second Home
Your second home doesn’t just have to sit there waiting for you to use it. A lot of owners will rent out their second homes when they are not in use to make extra income. Additionally, you may decide to upgrade your second home and sell it in the future when you can make a profit off of it. Whatever you decide to do, the following are a few things you should know:
Tax Rules When Renting Out
Renting out your vacation home is a great way to earn some additional income, especially if you’re just renting the house for short term periods. However, it can make your taxes more complicated as a result. This is because you may end up being taxed on your rental income as either a self-employed individual or as a landlord.
Renting The Place For 14 Days Or Fewer
If you only rent your second home out for 14 days or less, you don’t have to worry about reporting the rental income you’ve made to the IRS. This can be quite beneficial if you want to capitalize on nearby events that draw a lot of people. For example, maybe your second home is located near a big lake that holds a three-day fishing competition every year. You can rent your second home out during this three-day period. The money you earn renting your house out could be used to offset the costs of maintaining the property throughout the year.
Renting Out For More Than 14 Days
If you rent your second home out for more than 14 days total throughout a single year, you will have to report the income you earned off of rent and it will be taxable. Additionally, any deductions that you take, such as mortgage interest deductions or property tax deductions, will be limited to the amount of rental income that your property generates.
Selling It In The Future
When you sell your primary home, you won’t have to pay a capital gains tax on the first $250,000 that you make off the sale. Married couples have an even larger exemption since they won’t have to pay capital gains tax on the first $500,000 that they make from a sale. However, capital gains taxes work a little bit differently when it comes to selling a second home. Generally speaking, if you sell a second home that you’ve owned for at least a year, you’ll have to pay a capital gains tax of up to 15 percent on the profit you make. There are some other factors that are taken into account, such as depreciation and home improvements, which can make things a bit more complicated.
3. Always Enlist the Assistance of a Professional
If you’re planning on buying a second home, strongly consider seeking the help of a financial advisor or tax advisor before you even make the purchase. Not only can they help ensure that you don’t leave money on the table when it comes time to pay your taxes, but they can help you better understand how you can leverage your ownership of a second home to increase your wealth.
The advice that a professional can give can help to not only lower your taxable income, but also help you claim all of the tax benefits that you are entitled to. Whether you’re renting your second home out or eventually selling it, a professional financial advisor can help figure out ways to ensure that your profits aren’t undercut by taxes.
Greater Effect on Your Entire Asset Base
A good financial adviser can help provide guidance in terms of what it is you want to do with your second home to improve its value. Both depreciation and appreciation will have a big impact on your entire asset base.A professional can help you consider the potential of both before investing in a second property.
When Planned Right Your Second Home Should Really Help at Tax Time
Don’t wait until after you’ve invested in a second home to hire a tax advisor. A good tax advisor can help you better understand what you should expect to pay come tax time and what you can write off. You can save a significant amount of money avoiding certain traps while also ensuring that you deduct everything that’s deductible so that you don’t leave money on the table.
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