What to Know When Buying a Vacation Home

What You Should Know About Taxes When Buying a Vacation HomeBuying a vacation home can be a wonderful time in any homeowner's life, though it is different than buying a home for the first time. It's more than a sign of financial stability, it's an opportunity to live a different lifestyle for a few weeks (or months) of the year. It's a chance to rent out the home and receive a sizable second income from the investment. Before hunting for that perfect property though, it helps to understand the tax implications of a new home, and how finances will be affected before April 15 of next year.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

Changing News

The tax implications of buying a vacation home largely depend on where it's located, if it's rented out, and how much debt an owner has accrued. Before the new tax code was passed, homeowners could deduct mortgage interest on up to a million dollars of debt from their taxes (per married couple).

However, from now until the end of 2025, homeowners can only deduct interest on up to $750,000. If a married couple if filing separately or a single person is purchasing the vacation home, the debt is capped at $500,000. Those who have a home equity loan can only deduct interest from their taxes if they can prove the money was made to the primary property for which the loan was originally taken.

A Renter's Dilemma

The above rules are for those who use their vacation home as their primary residence. Those who rent out their home are subject to different rules based on the number of days per year the home is rented. Renting out the property for two weeks (or less) does not impact the primary home tax implications. Homeowners will not need to report the income to the IRS (regardless of the market rate of the home) or adjust their interest deductions.

Second Highland Park homeowners who are planning to rent the home for more than 14 days will need to calculate how many days the home was rented against how many days the homeowner stayed in it. If the homeowner stays in the home for 14 days or 10% of the days the home was rented, then the rental income must be reported to the IRS. If the homeowner is performing renovations to the home, this does not count as a primary stay.

How to Claim Rental Income

When it comes to claiming rental income, there are deductions homeowners should take advantage of:

  • Mortgage interest(up to tax code limits)
  • Property taxes
  • Home insurance
  • Utility bills
  • Up to half of home depreciation
  • Property manager bills (If applicable)

All costs must be allocated based on the number of days spent renting and living in the provided space. Depreciation is based on the wear and tear of the home as opposed to the market price of the property. If the home underwent significant damage during the year from rental guests, this can significantly impact the total cost of taxes. However, homeowners should strive to be as accurate as possible when calculating depreciation. Declaring too much can negatively impact capital gains tax in the case of a market spike at the time of the home sale.

Because the tax code can become complicated, it helps to talk to a financial or real estate expert first. This can make it easier to structure how much time is spent in the home and how much time to rent it out.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

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