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Sajid Ali
For most of us, our primary home is located near our workplace, but our second home is situated in a place where we want to settle down permanently after retirement. Your second home shouldn’t just be a retirement or vacation home, but it should also provide you certain tax advantages. Let’s take a look at some of the tax benefits that your second home can generate.
Eligibility for tax benefits
Your vacation home can be a condo, a standalone house, apartment, duplex or cabin. It can even be a vehicle or boat. However, it will become eligible for tax deductions only when it has a well-defined kitchen, bathroom and sleeping area. Hence, before buying a second home make sure that all these features are present.
Efficient equity building device
If you have taken a home loan to buy your vacation home, then you can claim tax deduction on the mortgage interest payment you make every month. The homeowners insurance that you pay to ensure the safety of your new home and the property taxes are also fully deductible. Besides giving these tax benefits, your second home is an excellent equity building device. Its value is bound to appreciate with time. So, after a few years, if you decide to sell off the property, you will certainly be able to garner heaps of profits. Furthermore, you will also get more time to pay off your mortgage loan.
Good source of rental income as well as tax benefits
You can generate rental income as well as tax benefits from your second home in three different ways. Let’s try to decipher the three mechanisms.
รข€¢ Personally use your second home- If you rent out your home for less than 15-days, then the rental income is totally tax free. You don’t even have to report this income in your annual tax statement. You can continue to deduct the monthly mortgage payments, insurance and property taxes. However, you cannot deduct the expenses related to the rental.
รข€¢ Fully rent out your second home- If you use your vacation home for less than 15-days in a year and for the rest of the period of time it remains on rent, then your house becomes a rental property. In addition to reporting the rental income in your annual tax statement, you become eligible for different tax benefits. For instance, you can deduct the expenses made on repair and improvement, correction of damages caused by natural calamities, and the like. With time and usage, the value of the property depreciates. You can claim tax deduction on annual property depreciation too. Rental property management is another area where tax benefits are granted by the Government.
If you earn profit from your rental income, then all the expenses are deducted from the profit. However, if you register loss, the deduction is limited by the rule pertaining to passive activity. As per the rule, if your rental income is less than $100,000, then you can claim $25,000 of losses. If the income is more than $100,000, then the allowable rental loss decreases until the rental income becomes $150,000, after which the loss is all together eliminated.
รข€¢ Rent out a portion of your home and live in the other half- If you use your second home partially and rent out the remaining portion, then too you would have to report the rental income. Moreover, you will become eligible for all the tax benefits associated with rental property.
Eligibility for tax benefits
Your vacation home can be a condo, a standalone house, apartment, duplex or cabin. It can even be a vehicle or boat. However, it will become eligible for tax deductions only when it has a well-defined kitchen, bathroom and sleeping area. Hence, before buying a second home make sure that all these features are present.
Efficient equity building device
If you have taken a home loan to buy your vacation home, then you can claim tax deduction on the mortgage interest payment you make every month. The homeowners insurance that you pay to ensure the safety of your new home and the property taxes are also fully deductible. Besides giving these tax benefits, your second home is an excellent equity building device. Its value is bound to appreciate with time. So, after a few years, if you decide to sell off the property, you will certainly be able to garner heaps of profits. Furthermore, you will also get more time to pay off your mortgage loan.
Good source of rental income as well as tax benefits
You can generate rental income as well as tax benefits from your second home in three different ways. Let’s try to decipher the three mechanisms.
รข€¢ Personally use your second home- If you rent out your home for less than 15-days, then the rental income is totally tax free. You don’t even have to report this income in your annual tax statement. You can continue to deduct the monthly mortgage payments, insurance and property taxes. However, you cannot deduct the expenses related to the rental.
รข€¢ Fully rent out your second home- If you use your vacation home for less than 15-days in a year and for the rest of the period of time it remains on rent, then your house becomes a rental property. In addition to reporting the rental income in your annual tax statement, you become eligible for different tax benefits. For instance, you can deduct the expenses made on repair and improvement, correction of damages caused by natural calamities, and the like. With time and usage, the value of the property depreciates. You can claim tax deduction on annual property depreciation too. Rental property management is another area where tax benefits are granted by the Government.
If you earn profit from your rental income, then all the expenses are deducted from the profit. However, if you register loss, the deduction is limited by the rule pertaining to passive activity. As per the rule, if your rental income is less than $100,000, then you can claim $25,000 of losses. If the income is more than $100,000, then the allowable rental loss decreases until the rental income becomes $150,000, after which the loss is all together eliminated.
รข€¢ Rent out a portion of your home and live in the other half- If you use your second home partially and rent out the remaining portion, then too you would have to report the rental income. Moreover, you will become eligible for all the tax benefits associated with rental property.
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