Tax Responsibility for Second Homes
Buying a second home on the beach is a dream come true for many Americans. But getting back-and-forth on a regular basis can become more hectic than one realizes. This is often because of day-to-day life and things popping up like sports games, birthday parties, and other work or non-work-related events.
Sometimes you may find yourself unable to get out to your vacation beach home and before you know it, it has been several months since you last got to the beach. This leads some to decide to rent out their property on sites like VRBO to help offset the cost of the home while they are not using it.
If you are own a vacation home and make no plans to rent the property out and only use it for personal benefit it is easily deemed as a second home. If you never use a home for either vacation or daily living and hold it merely for investment purposes it is deemed as a rental home. If you both use it and rent it out the IRS gives some room for interpretation when it comes to paying taxes.
So, what tax responsibility is required from a second home vs. a vacation home?
For a home to be rented and still considered as a second home you need to have used it for the personal benefit a majority of the time. You can rent out a second home for 14 days or less over the year and keep the money without being required to categorize your second home as a rental property for taxes.
If you are using your second home both as a vacation property for personal use and as a rental for more than 14 days you can allocate deductions between two categories. Say you were to spend 20 days on vacation using the home for personal reasons and you rented the home out 80 days to a couple of different vacationers, the IRS would say that the property is eligible to be looked at as 20% second home and 80% rental property.
General tax requirements of second homes
Most often a second home will be taxed in the same way as a first or primary residence. Often a second home can write off property taxes in the same manner as a first home. These same rules apply for mortgage interest and the limits that the IRS imposes.
Eligible tax write-offs of course do depend upon the state in which you live as they will have additional requirements on top of any federal tax responsibilities for homes.
General tax requirements of rental homes
Rental properties are treated as investment real estate. It is required of the property owner to report income and expenses that you receive through rent paid and improvements and other items made to the home. This is all reported on a Schedule E form that allows the property owner to deduct almost every expense incurred of owning the property. Taxes will be paid on any profit made from the property after expenses.
If you end up paying out more than you bring in this is considered as losing money on your investment and you can use the loss to offset income from other investment real estate properties or claim up to a total of $25,000 of the loss against other income that you have.
General tax responsibilities for dual used properties
When you have a property that is used as both a private second home and an investment rental that you have rented out for more than 14 days the IRS will require you to split the use of the home for tax purposes.
This can be done by combining the number of days that the property was rented with the number of days that you used it excluding any days that you were on the property to perform any maintenance work. You will need to find the percentage of days that the property is used as a rental in proportion to how many days it was used for personal property. These percentages will be used to allocate cost and tax responsibility.
The best use of your second or vacation property from a tax standpoint is best conversed with a tax professional with real estate experience. In some cases, it may be more beneficial to keep your home strictly as a second home instead of renting it out to cover the expenses of owning the home.
For more information on purchasing a home in West Ocean City and surrounding areas please contact us anytime.
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