Savvy tax planning can make a difference in your return on the property. Tax implications for second homes can vary significantly based on your financial situation and whether or not you plan to rent out the property. Keep these in mind when figuring the impact on your taxes:

• Consider property taxes, utilities, homeowners association fees and other applicable expenses.
  
  
• Generally, the interest on the mortgage of your second home is tax deductible, and rental properties are subject to additional tax breaks. "If it's an investment property, then the deductions come in an array of possibilities, including depreciation of the real estate itself and a separate, accelerated depreciation of personal property such as furnishings," Krinke says. "Owners can use the property only for two weeks a year to get certain tax benefits on rentals," Greenstein cautions.
  
  
• If you rent out the home for 15 days or more during the year, you have to report all rental receipts to the IRS as income, but you can also deduct operating expenses such as utilities, repairs, insurance and management fees against that income.
  
  
• Consider strategies for reducing or deferring capital gains upon the sale of the home. For example, the Internal Revenue Code Section 1031 tax-deferred exchange allows for the deferral of capital-gains tax by exchanging for "like kind" property allowing for taxes to be paid when a sale of a second or third property is ultimately realized. As a general rule, 1031s are used when you sell real estate held for investment purposes and not for the sale of your personal residence.
  
  
• Always consult with a tax professional or a specialist such as a national qualified intermediary for tax-deferred exchanges before getting too far into the second-home buying process.

<< Step 3: Explore financing options and negotiate with the seller I Step 5: Research alternative ownership options >>

Comments