Top Show Updated for Tax Year 2022 • November 9, 2022 11:11 AM OVERVIEW Buying a second home? TurboTax shows you how mortgage interest, property taxes, rental income, and expenses will affect your tax return. Mortgage interestIf you use the house as a second home—rather than renting it out—interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home.
Property taxesYou can deduct property taxes on your second home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own. However, beginning in 2018, the total of all state and local taxes deducted, including property and income taxes, is limited to $10,000 per tax return. If you rent out the placeLots of second-home buyers rent out the property part of the year to get others to help pay the bills. Very different tax rules apply depending on the breakdown between personal and rental use. If you rent the place out for:
Consider this exampleIf you and your family use a beach house for 30 days during the year and it's rented for 120 days, 80% (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be rental expenses.
You can always deduct expenses up to the level of rental income you report. But what if costs exceed what you take in? Whether a loss can shelter other income depends on two things: how much you use the property yourself and how high your income is. Your use can be limitedIf you personally use the place for:
Fix-up days don't count as personal use. The tax savings from the loss helps pay for the vacation home. Unfortunately, holding down personal use means you have to forfeit the write-off for the portion of mortgage interest that does not qualify as either a rental or personal-residence expense. Passive lossesWe say such losses might be deductible because real estate losses are considered "passive losses" by the tax law. And passive losses are generally not deductible. But there's an exception that might protect you. If your Adjusted Gross Income (AGI) is less than $100,000, up to $25,000 of such losses can be deducted each year to offset income such as your salary.
Tax-free profitsAlthough the rule that allows home sellers to take up to $500,000 of profit tax-free (up to $250,000 if you're unmarried) applies only to a sale of your principal residence, there is a way to extend the break to your second home: make it your principal residence before you sell. That's not as wacky as it might sound. Some retirees, for example, are selling the big family home and moving full-time into what had been their vacation home.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. |