Owning a second home can be pretty awesome.
And there's abenefit that's often overlooked: the tax breaks.
Thanks to our partners at Realtor.com for this great list that you should be double-checking if you're one of those procrastinating-types that still hasn't filed this year!
1. Mortgage interest.
When it comes to owning a second home,the interest on your mortgage is deductible. The same rules that come withwriting off mortgage interest for your first homeapply to your second.
In fact, you can write off as much as 100%of the interest you pay on up to $1 million of debt, which includes total debt taken on to pay for both homes, as well as money spent on improving the properties. (That's not up to $1 million foreachpropertyjustup to $1 million in total.)
2. Homeimprovements.
Is your second home a fixer-upper? If you want to spend the off-season making improvements to your hideaway, you candeduct the interest ona home equity loan or line of credit.
Butthere are a couple of exceptions.
For starters, there will be a limit on the amount you can deductif the home equity loan on your main or second home is more than $50,000 if filing single or $100,000 if married or filing jointly.
Second, theamount you can deduct has a limit if the mortgage is more than the fair market value of the home.
For example, let's say a taxpayer has a mortgage of $220,000 and takes out a home equity loan of $65,000. The property's fair market value is $275,000. Since the difference between the fair market value and the mortgage is $55,000, then $55,000 of the home equity loan can be deducted, not the full $65,000.
3. Property taxes
You can also deduct your second home's property taxes, which are based onthe assessed value of the home. That's good news. Evenbetternews? Unlike the mortgage interest tax deduction, there's no dollar limit on the amount of real estate taxes that can be deducted on any number of homes owned by the taxpayer.
But beware: Taxpayers who can afford two homes are likely to land in a higher tax bracketwhich means slimmer pickings for tax savings. For example, in 2016, a married couple whose gross income exceeds $311,300would have limits on the types of itemized deductions they could take.
4. Renting out your home
If you rent out your second home for 14 days or less over the course of a year, that rental income is tax-freeand there's no limit to what you can charge per day or week.
But if you're hoping to put your secondary digs on Airbnb or another rental site for more than 14 days during the year, be prepared to do some heavy math come tax time.
For instance, let's say you rentedout your vacation home for 30 days within a year, and vacationed in your home for 90 days.
We'll divide 30 (the days you rented it out) by 120 (the total number of days the home was used). The result: 25% of your rental-related expenseswhich could range fromutilities tothe cost of a property managercan be deducted. Now, if your home is losing value, that same percentage (in this example, 25%) ofdepreciation costscan also be deducted.
But..depreciationcosts can be deductedonlyif there is rental income remaining after taking into account other deductions, such as mortgage interest, property taxes,and direct expenses tied to renting your homelike agent fees or advertising.
5. When it's time to sell
Maybe you bought a far-off hideaway that you're lucky to visit a couple of times a year. Or perhaps your vacation home is just a quick drive away, and you spend every possible moment there.
If it's the latterand you don't already know which of your homes is your primary residence and which is the second homenow's the time to figure it out. Distinguishing betweenthe twocan have big tax implications when it comes time to sell.
That's because a capital gain of up to $250,000 (or $500,000 for taxpayers who are married/joint filers) on the sale of the principal residence may be excluded from taxable income.
Your principalor primaryresidenceisthe home you used most during the five years prior to the sale. But other factorssuch as your job's location, voter registration address, and banking locationcould also come into play. Among other requirements, you must own and use that principal residence for at least two of the five years before the home is sold.
We knowthat's a lot of heavy stuff to take in. But you knew yoursecond home would pay off in more ways than one, right?Now, hurry up and file your tax returnso you canescape to your happy place and forget about burdensome things. Like taxes.
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