Homeownership is a staple of the American Dream. The road to obtaining a home isn’t always smooth but well worth the trouble. Homeownership could possibly save you more money than renting a property for the rest of your life. Homeowners, one could argue, benefit the economy more as well—property taxes, mortgage interest rates and closing fees generate a lot of income for banks, states and the federal government. In an effort to encourage purchasing, the IRS offers a variety of tax-breaks for owners. If you own more than one residential property or are interested in purchasing a second property, be sure to take advantage of second-home tax breaks.
Housing bubble burst helps homeowners
The housing bubble burst left many homeowners devastated. Foreclosures rampantly grew across the nation, as people were no longer able to make their mortgage payments. Some of those who owned a second property had to sell to an independent buyer under market value. Homeowners who weren’t affected by the crash were able to purchase vacation homes in various locations under traditional market value. A second property can be used as a rental home, a second home or an investment property.
What qualifies as a second home?
One may purchase a second home for an assortment of reasons. Some people purchase a home for aging parents or adult children. Some people purchase a home to use for vacation trips. Others may purchase a second property with no intention to live there but to solely make extra money. In order for your second property to be considered a legal “second home,” it must meet the following guidelines:
- Most mortgage lenders acknowledge a second home as one that is located a minimum of 50 miles away from your primary property
- The property must be livable year-round
- Your vacation home can be a qualified second home if you don’t rent it out
- “If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home.” (IRS, Publication 936)
Show me the perks!
One of the benefits of owning one home is that you can write off your mortgage interest and real estate property taxes and even deduct interest on home equity debt when filing your federal taxes. Of course, there are certain stipulations and requirements that you must meet. A conversation with an IRS representative can help you fully understand how to properly file your taxes.
If you rent your second home for 14 days or less during the course of a year, you do not have to pay taxes on the income you generate. If you decide to rent your home for more than 14 days, the income your make is subjected to taxation. If you own a third home, the mortgage interest you pay for that property could be deducted as well, along as you are using it as a business or investment property. It is important to restate that if you do not occupy the second property at all, it is considered a rental property. You cannot write off the mortgage interest for a rental property.
Thinking about purchasing a second home? As of January 10, 2014 the Consumer Financial Protection Bureau made changes to mortgage applications. You may have to fill out a 500-page form. Read more about it here.
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Popular Tax Breaks May Disappear