Maximize tax deductions
Purchasing a second residence can be costly and involves a lot of effort, however, the payoff is greater: having your place to relax and unwind, to enjoy the weather and the views, and to spend valuable time with your family. Without noticing, it is just one of the benefits you have when you buy a second home as you will also receive benefits in tax deductions.
Once you decide to buy a second home, you should always consider the best alternatives to reduce the costs of mortgages, recurring expenses, and taxes. Always get advice and understand the final cost, this will help you avoid unexpected expenses.
What many people do not know are the benefits that they can receive with tax reduction when buying their second home. This reduction will depend on the use you give to your house, thus, there are several types of tax reductions.
Interest in mortgage
When looking at mortgage interest deductions, you first need to consider how you define your second home: investment strategy, personal home, or a combination of both. If you decide to use your second home with your family and friends, then you can deduct the mortgage interest the same way you would do with your primary residence.
If you wish to rent out your second home for some time, you may be able to do so and still adhere to the personal residence tax laws, all without having to pay taxes on the rental revenue. Keep in mind that you need to spend more than 14 days or more than 10% of the days you plan to rent out so that you can obtain this advantage. Remember don’t go crazy!
Following the 14-day or 10% rule, you will not be taxed on the rental revenue, regardless of the rate you charge. As long as you follow the rules, you can deduct that amount from your annual revenue.
Deduction on property investment
If you never use your home and solely rent it out, the regulations are different. Renting out your home for more than 14 days a year or only using your home for 14 days or less is recognized as a rental property rather than a personal residence. In such an instance, your second home is classified as an investment property and is eligible for a set of tax reductions.
Investment properties can’t take advantage of the mortgage interest deduction, but they have unique tax strategies that can be used such as annual depreciation deduction. If your second home is for investment or rental purposes, the IRS thinks the item has a finite useful lifetime under the depreciation deduction. That is, the cost of the residence can be subtracted progressively over a 27 ½ year period.
Taxes on property
Despite the mortgage interest deduction, you can take advantage of property taxes deduction on your second residence. This type of reduction has a limit of tax return up to 10,000$, however, if you have already exceeded this limit with your first house, you won’t be able to benefit from this tax savings.
Expenses on rental
If you decided that your home is only for rental purposes, you can reduce some expenses in addition to taxation such as insurance, housekeeping, utilities, maintenance expenses, property manager fees, and other charges included when renting. At first, they might not sum a big expense, but over the year, it can become a significant reduction in taxation.
Important to note
- Repairs and improvements in your second residence do not count as personal use, thus, make sure you have all receipts
- Keep track of the costs you have when you use your home and when you rent out. These expenditures need to be divided.
The topic of tax reduction can be a bit complicated, however, it is always necessary to seek advice to avoid headaches in the future.
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