What to Know About Taxes and Paperwork When Buying a Vacation Home
Whether a vacation home is traditionally luxurious or purchased as a fixer upper, it's always going to be an extravagant purchase for any owner. From the most rustic cabin in the woods to a beach property complete with infinity pool, a second home is a chance to escape from the everyday grind without having to research places to stay, where to go, and how to get there. But as most owners might imagine, the tax situation and legality of a second home isn't the same as a primary residence. It helps to know what everyone's getting into before going any further down this road.
Personal Residences
For people who plan to make their vacation home their personal residence, they can expect a few standard deductions such as mortgage interest and property taxes. However, there is a cap on the amount of interest that can be deducted and that cap was recently changed in the new tax bill. The interest can be deducted based on the amount of debt an owner has between their two homes up to $750,000. So if an owner owes $750,000 on their primary residence and $500,000 on their vacation home, they won't be able to deduct any of the interest for the vacation home.
Over-Under
For those who want to rent out their property, they'll need to calculate their taxes based on the amount of time that they plan to stay there. Homeowners are allowed to rent out their property for up to 14 days out of the year without reporting that income to the IRS. The amount of money generated is irrelevant, as long as the amount of days doesn't exceed 14. For those who will plan to rent out the property for more than 14 days, they must report that income to the IRS so it can be taxed according to the owner's standard income bracket.
Losses and Deductions
For those who plan to use the home for only 14 days out of the year or 10% of the number of days the home was rented, they can technically classify their rental home as a business enterprise. Owners are allowed to use whichever number is greater, meaning if they choose to rent out the home for only 30 days out of the year, then they're still allowed to stay at the home for 14 days as opposed to three. In this case, owners are allowed to deduct all business-related expenses at this point, including half the depreciation of the vacation home and rental income losses up to a certain amount.
Staying and Selling
Owners who stay in the home for more than two weeks (or 10% of the days rented) are not allowed to deduct rental losses. Contacting a tax attorney is usually the best way to handle a Homer vacation home that is occasionally rented out, especially considering that keeping expenses straight can become rather complicated. When it comes to selling a property, owners will typically have to pay full capital gains on any appreciation of the rental home.
Additional Paperwork Needed for Vacation Home Mortgage
Most mortgage companies will require additional paperwork from a buyer of a vacation home. Since the vacation home is not assumed to be the primary residence of the buyer, mortgage companies are more cautious in lending money. Additional paperwork requested from a vacation home buyer could include more information about current and past employment, debt or future intentions for the property. Since the buyer does not intend to occupy the property, a mortgage lender may feel less obligated to grant a mortgage to the buyer.
Having a second home may seem like a way to unburden yourself from the hassle of vacation planning, but it also comes with more than a few legal questions for the owner—especially considering the updated tax codes. Choosing to rent it out can be an excellent way to pay for (or even profit from) a second home, but the current legal structure can make it harder to achieve that dream.
Post a Comment