How Owning a Vacation Home Affects Your Taxes
Most people decide on buying a vacation home with the intention of having a place to go and relax once or twice a year. It’s a wonderful idea, but before you finalize that purchase you should be aware of the responsibilities that follow. One of the most important things to consider when buying a vacation home is taxes. At what point are the taxes on your second home able to be deducted, and what affects the amount? Your friends at Maggi Tax want to make sure you know how to properly handle such an important purchase.
Are Vacation Homes Tax-Deductible?
The short answer is yes, vacation homes can be tax-deductible. Even so, there are many factors to keep in mind when planning out exactly how you want to use the property.
Here are the main uses for vacation homes:
- Personal use. Will this be a place where you bring your family and friends a couple weeks a year?
- Renting out. Is this property just going to be another source of regular income while you carry on per usual?
- Pure investment. Are you buying the property for the sole purpose of selling it in full at a later date?
Depending on your intentions, your taxes will be affected accordingly.
Personal Use vs Renting Out
Your vacation home is officially declared a personal residence if you use it for more than 14 days out of the year. If your family (parents, children, spouse, etc.) uses the property even without your presence, those days still count towards the 14 days of personal use. At that point, you can deduct mortgage interest and property taxes as you would your primary home.
Renting out the property comes with a different set of rules. The house is determined a rental if it is rented out for 14 or more days a year, along with less than 14 days of personal use (or if the personal use does not exceed more than 10% of the rental use). For rental properties, you’re able to deduct associating expenses such as insurance costs, property management fees, utilities, property depreciation, housekeeping, and repairs along with the usual mortgage interest and property taxes.
Tips for Maximizing Tax Deductions
The easiest way to maximize tax deductions on a vacation home is to limit the amount of use of the property. If you only rent out the home for less than 14 days a year, you can exclude it from your tax report. The same goes for personal use as long as you limit your stay to under 14 days or less than 10% of the number of days you rent it out for. To keep it simple, your personal use should be limited to one day for every 10 days that it is rented out.
Selling Your Vacation Home
When selling your second home, a good chunk of it goes to capital gains tax since the sale is considered profit from an investment. One way to mitigate the tax cost is to transform your vacation home into a primary residence prior to making the deal. To do that, you need to live on the property for at least two years without making any other sales during that time.
The Choice Is Yours
Whether you want to use your new vacation home for your own personal enjoyment, rent it out for steady long-term profit, or make a single large profit, now you know what to expect for every possible outcome.
If you have any more questions or need help working out the details of your vacation home purchase, give Maggi Tax a call to receive expert care you can count on.
