A second home could be a house in a ski resort, a cabin on a lake or in the mountains or just a house in another area to let you escape from summer heat or winter cold. A boat, if it has sleeping, eating and sanitary accommodations, also qualifies. You might decide to buy a second home for personal use or for an investment. Along with any personal pleasure you get from the residence, you also will receive extra deductions on your federal taxes.
Interest and Taxes
Mortgage interest and property taxes are the major tax benefits of a second home. You can deduct 100 percent of interest and property taxes on both homes, up to a total of $1 million if you're married and filing jointly or $500,000 for single payers. You're limited to two homes, your primary residence and one second home.
Interest is also deductible for second mortgages or home-equity loans or lines of credit, up to $100,000 for joint filers. You can get a line of credit to buy a car or boat and still deduct the interest so long as the loan is secured by a home. If you have a variable line of credit, you can only deduct interest on money you actually take out.
You also can deduct "points," often called discounts or loan-origination fees, when you buy a home or refinance a mortgage. You can deduct points charged when you first close a mortgage. If the mortgage is for the second home or a refinancing of your primary home, however, you have to spread the point deduction over the life of the loan.
Your property taxes are deductible in the year they're paid. Don't confuse annual taxes with the tax charges on a mortgage escrow account, which holds money to pay them as bills come in. Use the actual tax collected. You should get a statement from a local tax agency and also an annual accounting from your mortgage holder.
Renting your second home can reduce your deduction. You have to spend at least 14 days a year using the home or 10 percent of the time it's rented, whichever is longer, to get the deduction. Otherwise, the IRS will consider it a rental property. You'll have to report, and pay taxes on, rental income and reduce your deductions by the percentage of time it's rented.
You have to itemize deductions on a Schedule A of a Form 1040 tax return to claim interest and property taxes. To be worthwhile, your total interest should exceed your standard deduction, which in 2012 was $7,100 for couples filing jointly or $4,250 for singles. You can boost your deduction with extra payments, for instance paying a January bill in December.
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