Just like your primary home, a vacation home is likely to have a major impact every time April 15 rolls around. According to the National Association of Tax Professionals (NATP), mortgage interest and property taxes on first and second homes alike may be claimed as Schedule A deductions, but to avoid unfriendly encounters with the IRS, buyers should be aware of some important differences in the way second homes are taxed.
- The NATP advises that homes rented out for fewer than 15 days during a given year are considered personal-use property by the IRS. Owners are not required to report the rental fees as income, and no other deductions (aside from mortgage interest and property taxes) are allowed.
- If you decide to rent out your second home for 15 days or more during the year, get ready for a flurry of additional paperwork, beginning with the requirement that all rental receipts be reported to the IRS as income. The NATP adds that operating expenses such as utilities, repairs, insurance and management fees can be deducted against the rental income, with deductions allocated according to the number of days the property was rented versus the number of days it was reserved for personal use. Travel expenses related to maintaining a rental property may be deducted in some circumstances, but no travel deductions are allowed for properties rented out for fewer than 15 days.
- Unlike your primary residence, all profits from the sale of second home will be taxed as a capital gain, though it may be possible to make a sneaky (albeit perfectly legal) end-run around the capital-gains tax requirement if you move into your vacation home and treat it as your primary residence for at least two years before selling.
For more information and referrals to certified tax advisers, visit www.natptax.com.
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main page(Morris Dye is a California-based writer and travel journalist who's still saving for his dream vacation home on a beach in southern Thailand. His work has appeared in the San Francisco Chronicle, Islands Magazine, TIME Asia, Fineliving.com and other publications.)
