Financing a Second Home
Know tax, insurance issues to sidestep potential problems
By Morris Dye |
Published: 11/01/2007
Don't forget the tax man. Like your primary residence, mortgage interest and property taxes on a second home can be claimed as Schedule A deductions. But keep in mind the ways second homes are taxed when you use them as rental properties:
- Homes rented out for fewer than 15 days during a given year are considered personal-use property by the IRS. Owners are not required to report the rental fees as income, and no other deductions (aside from mortgage interest and property taxes) are allowed.
- If you rent out your home for 15 days or more during the year, you have to report all rental receipts to the IRS as income. Operating expenses such as utilities, repairs, insurance and management fees can be deducted against the rental income, with deductions allocated according to the number of days the property was rented versus the number of days it was reserved for personal use. Travel expenses related to maintaining a rental property may be deducted in some circumstances, but no travel deductions are allowed for properties rented out for fewer than 15 days.
- Unlike your primary residence, all profits from the sale of a second home will be taxed as a capital gain. But there may be a loophole. Move into your vacation home and treat it as your primary residence for at least two years before selling, and you may get around the capital-gains tax requirement.
- For more information and referrals to certified tax advisers, visit www.natptax.com.
- Resist the urge to impulse buy
- Evaluate your needs and long-term goals
- Get to know the area before buying
- Hire a local real estate agent
- Decide what type of home is right for you
- Shop around for a mortgage
- Calculate additional expenses
- Consider fractional ownership to cut down on costs
- Look into tax benefits
- Rent your home out for extra income
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