The current real estate status makes this time perfect for buying a second home. With prices sliding down and with the existence of foreclosed and short sale homes, people can avail of the most affordable deals in real properties. However, price is not the only advantage you get should you buy a second home. You will also get great tax benefits from it.
Application of Tax
Second homes are taxed differently according to use. It varies if it used plainly as a vacation home, as rental property and upon selling it. Here’s how it works:
If the property is for personal use (this means it was used as a vacation home or has been rented out for less than 14 days), there are several ways to lower the tax. One main practice is the application of deductibles. Below are the allowable deductibles:
- Mortgage Interest- When you get mortgage, you pay interest expense periodically. According to the IRS the full amount of the interests incurred from a home acquisition debt of 1.1 million can be deducted.
- Taxes from property- You can deduct this item all the time and it would not matter how many houses you owned.
- Points- This should only be deductible over the life of the loan.
If the personal property is used as a rental home for less than 14 days, the income you get is tax-free. This means, you do not have to declare it upon filing. In addition, the same deductibles can apply except for the operational expenditures.
If the property has been used for rental purposes and was used for more than 14 days, tax rules are now different. The rental income shall be declared and will be included for calculation of tax. However, new items can be added as deductibles such as operation expenses. Whatever you spent for maintenance, office supplies and traveling can be used to reduce the amount of tax.
If the property was used as a rental home and a personal abode, the owner must pro-rate the expenses.
Issues on Losses
There may be times when rental expense exceeds the rent income. In the case where the property is qualified as used for business, the losses can be deducted against your personal income. However, the adjust gross income should fall below 100,000 dollars. If it exceeds up to $50,000 over the limit, it shall be phased-out. However, the amount of loss can be accumulated and can be applied once the property is sold.
Selling Second Homes
Tax strategies can be applied if you decide to sell your second home. However, you have to make it as your primary home at least two years prior to selling it. If this happens, a small portion of your capital gains will be taxed. And the percentage is determined by dividing the number of years used as a main residence divided by the total years it was owned.
It is important to determine your tax benefits before you purchase your second home. To find more about it, you may seek help of an accountant or tax advisor to help you weigh the advantages and disadvantages.
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