There will come a point in your career when you will be able to sit back, look at your business and be proud of all that you’ve accomplished. Your business is a success! You are considered a community leader! You continue to grow the value of your company and are looking forward to securing a comfortable retirement! You have achieved countless personal and professional goals and are ultimately living the life you’ve always dreamed of living, and you have every right to celebrate. Oftentimes, successful business owners choose to acquire real estate, which serves as a tangible representation of their success. For many, the prospect of buying a second home is a desirable investment, not just because it’s useful, but because it can bring added tax benefits.
In this line of work, we frequently hear from clients who want to learn more about the tax opportunities available to those who purchase second homes and whether there are any tax planning strategies to consider. Based on my experience, here are a few scenarios I encourage my clients to consider.
Read Also: Renting Your Property?
Change The Scenery
If you rent your home 14 days out of the year or less and use the home for personal use for 14 days or more, the property will be classified as personal use property, which allows you to deduct your real estate taxes and mortgage interest as itemized deductions on your personal tax return. In addition, if you rent your home out to your business for meeting space a few times a year (fewer than 14 days), your company can take a deduction for the expense of renting the property and you don’t have to claim the income on your personal tax return. Just make sure that they business purpose of the space is clearly defined.
Generate Extra Income
Rather than buy a vacation home that sits empty for the majority of the year, you may find that it makes sense to rent it out to others while you aren’t using it. If you do decide to go this route and rent it for more than 14 days of every year, remember that all income generated as a result of this transaction is taxable. That being said, a portion of the mortgage interest and real estate taxes may be deductible as rental expenses while some of your other expenses could qualify as itemized deductions. You might be able to take depreciation on the property as well. Furthermore, rental losses are limited based on your adjusted gross income and are carried forward during the years in which the loss cannot be taken. This whole process can get confusing. Therefore it’s important to sit down with your tax advisor to ensure that Uncle Sam gets his cut.
So you aren’t really on board with the prospect of renting your vacation home to strangers while you are away, but you really don’t like the idea of letting the house remain empty either. Another option to consider is renting the property to friends and family. If you take this route and rent it at a cost that’s less than what is considered to be a fair rental price during the weeks you are not using it, it’s considered personal use property, which once again allows you to deduct real estate taxes and mortgage interest as itemized deductions on your personal tax return.
Four Interesting Facts To Know Before You Buy
If you are struggling to figure out which state you should consider as the location of your second home or whether investing in a piece of land, timeshare or even a mobile home is more favorable to your specific situation, consider these interesting tax facts.
- If you decide to invest in a portion of land on which to build your home then, for whatever reason, change your mind and decide to sell the property prior to personal use, the gains or losses would receive capital gain or loss treatment. On the other hand, if you buy the land and, build a home, and, after a while, decide to sell it at a loss after having used personally, you will not be able to claim the loss on your tax return.
- Ever wonder if that boat, mobile home or house trailer qualifies as a second residence for purposes of the mortgage interest deduction? Good news – it does! That is, it qualifies for the deduction as long as it includes sleeping, cooking and bathroom facilities.
- Looking to purchase a vacation home far from the obligation of state income taxes? Then look no further than Florida, Texas, Alaska, Nevada, South Dakota, Washington, Wyoming, New Hampshire or Tennessee. These states don’t have a state income tax, which could lower the tax impact on your rental income and any gains realized from the sale of a piece of property.
- Listening to a salesman pitch the benefits of owning a timeshare can be terrifying, but taking the plunge and making the investment doesn’t have to be – at least from a tax standpoint. Timeshares can be considered second homes for the purpose of deducting interest expenses. However, if you decide to rent the timeshare to a third party, you may end up forfeiting the mortgage interest deduction. Another common misconception about timeshares is that letting a charitable organization stay there for a period of time will qualify as a charitable contribution. This is not the case. The only way to get a charitable deduction for your time share is to donate the entire property to a charity.
Are you in the market to buy a second home? Email the tax professionals and financial advisors at Rea & Associates today.
By Gabrielle Moore, LLM, JD (Dublin office)