Tax Questions for a Second Home
Whether you have a second home so you can vacation in comfort, have a second place to live or for investment purposes, it can make your tax situation more complicated. Some of the benefits that the Internal Revenue Service extends to your primary residence do not apply to your second residence, while others do. On the other hand, owning a second home can also create more tax deductions if the home is an investment.
Can I Write off My Mortgage and Property Tax?
If your second home isn't an investment, you can write off mortgage interest against it as if it was your first house. The IRS lets you write off the interest on up to $1 million of home purchase debt, which also includes loans you take out to improve or repair your property. As long as the loans on the two properties don't add up to more than $1 million, you can write off all of your interest. You can also write off the interest on up to $100,000 of home equity debt, which is debt that you place against your house for any reason. This limit also spans both properties. Property taxes, on the other hand, aren't subject to these limits. As long as you can write off the property tax on your first house, you can deduct it on your second house -- and, for that matter, on any other houses you own.
What Happens When I Sell?
When you sell your second home, you can't use the capital gains exclusion that lets you pocket up to $500,000 in tax-free profit from the sale of your primary residence. However, if you turn your second home into your primary residence, you can get around this limitation. For a house to qualify for the tax break, it needs to be your primary residence at the time of the sale, and you have to have lived in it for two of the past five years. If you can meet those two criteria, you can use the capital gains exclusion with one exception: The IRS will reduce your exclusion by the proportionate share of time since 2008 that the house wasn't your primary residence. The agency doesn't count time before 2008 against you. For example, if you bought a house in 2000, moved into it in 2010, spent three years in it, and sold it at the beginning of 2013, you'd be able to claim 85 percent of the credit, because the house only spent two years -- 2008 and 2009 -- since the 2008 law change as a second home.
Is My Second Home an Investment?
If you rent your second house out for less than two weeks per year, it's not an investment. You can even pocket the rent money tax free. If you rent the house out for more than two weeks per year and spend little personal time in it, it's an investment. The threshold is that you have to spend less than two weeks per year and less than 10 percent of the time that the house is rented. If you spend more time there, it's both an investment and a personal residence. In that case, you would allocate your write-offs based on the percentage of time that you use it.
How Is an Investment Treated Differently?
If your second home is an investment, you report the rental income you get from it, then write off every operating expense you incur in owning it. The IRS lets you claim all of your mortgage interest with no limitations, your management and advertising fees, your utilities and repairs and most other expenses. You can even deduct the cost of traveling to the property to inspect it and make repairs.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.