The rules that apply if you rent out the place are discussed later. Property taxes You can deduct property taxes on your second home, too. If you rent out the place Lots of second-home buyers rent out the property part of the year to get others to help pay the bills. If you rent the place out for: 14 or fewer days during the year, you can pocket the rental income tax-free. The house is considered a personal residence, so you deduct mortgage interest and property taxes under the standard rules for a second home.
More than 14 days, you must report all rental income. You also get to deduct rental expenses, and that gets complicated because you need to allocate costs between the time the property is used for personal purposes, and the time it is rented.
The entire amount you pay a property manager would be deductible, too. That's why lots of vacation homeowners hold down leisure use and spend lots of time "maintaining" the property. Passive losses We say such losses might be deductible because real estate losses are considered "passive losses" by the tax law. Passive losses you can't deduct can be stored up and used to offset taxable profit when you ultimately sell the vacation house. Any profit attributable to depreciation while you rented the place, though, would be taxable.
Depreciation reduces your tax basis in the property and, therefore, increases profit dollar-for-dollar. Got investments? State additional. Looking for more information?
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Interest on home equity loans and home equity lines of credit can be deducted, but only if you spent the borrowed money on home improvements. Before the tax reform law went into effect in , you could deduct the interest even if you used the money for other purposes, such as college tuition.
Your home equity loan or HELOC debt counts toward the total mortgage debt limit for deducting interest. So if your first mortgage is over the deductible limit, then the home equity loan interest won't be deductible. If you're within the limit to deduct all your mortgage interest, you may also be able to deduct discount points you paid when the mortgage closed.
Some homeowners buy discount points to lower the mortgage interest rate. The term "points" can be confusing because some lenders call their fees "loan origination points. Only discount points paid to reduce the interest rate can be deducted. You can get a tax break for paying property taxes, but there's a limit. You may deduct home office expenses if you're self-employed and use part of your home regularly and exclusively for your business.
You can use the IRS "simplified method" or your actual expenses to figure out the deduction amount for home office expenses. The IRS website provides details about determining whether your home office qualifies for a tax deduction and has worksheets for calculating the deduction amount.
When figuring out your medical expense deductions, you can include the cost of installing health care equipment or other medically necessary home improvements that benefit you, your spouse or a dependent. Permanent improvements that increase your home's value are only partly deductible. The deductible cost is reduced by the amount of the property value increase. Many improvements to make a home more accessible, such as constructing entrance ramps, widening doorways or installing railings and support bars, usually don't increase the value of a home and can be fully deducted.
The cost of mortgage insurance is currently deductible. The deduction includes the amount paid for private mortgage insurance for conventional loans and mortgage insurance for FHA loans. The amount you paid for mortgage insurance is treated as mortgage interest, the IRS says. The mortgage insurance deduction had expired at the end of , but Congress extended it to include premiums paid through the end of Think long and hard before you mortgage your retirement security to buy a home.
Overall, I'm a fan of homeownership. I have seen the benefits over the long term. I have also seen the devastation that rush purchases can wreak on a family's household finances. While the various tax breaks can make homeownership more appealing, they should never be the only reason you purchase a home. This is a BETA experience.
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