The Tax Implications of Purchasing a Second Home

If you are considering purchasing a second home, there are a number of different things that you will need to look at. One of the most important things to think about is the tax implications that are created by this scenario. Here are some of the tax implications of purchasing a second home.

Categories of Second Homes

In order to determine how you will be taxed on your second home, you need to determine which category it will fit into. The first category includes individuals that do not rent out their second homes and use them only as personal residences. The second category includes those that rent their second houses for a good portion of the year and also use the houses quite a bit. The third category is made up of individuals that primarily rent out their second houses, staying in them only occasionally. Each category will be taxed differently, so it is important for you to determine which one you fit into.

Personal Residence

If you treat the home as a personal residence, you will be able to take advantage of the most favorable tax structure. You will be eligible for this classification if you rent the home for fewer than 15 days out of the year. You would also need to use the home for more than 14 days out of the year. If you meet these obligations, you will be able to count the house as a personal residence. When this happens, you do not have to report any of the rental income that you have generated in the 15 days out of the year. In addition to this, you will be able to deduct the full amount of mortgage interest that you pay on the house from your taxable income. You can also deduct the full amount of property taxes that you pay from your federal taxes.

Renting and Using

If you rent the house for more than 14 days out of the year and you also use the house for more than 14 days out of the year, you would fit into another tax category. In order for the house to qualify as one for personal use, you can also count lending the house to family members or charging them rent that is below the market rate. In this example, you will be able to deduct the mortgage expenses and taxes from the portion of the year that was designated for personal use. You would then treat the other portion of the year as if you were a landlord; you could deduct operating expenses.

Frequent Renting

If you rent a house more than 14 days and stay in it less than 14 days, your house would fall into the rental house tax guidelines. You will not be able to deduct the mortgage interest on the loan from your taxes. This means that if you can somehow stay in the house over 14 days in a year, you can treat the house as a personal residence and get a larger tax break.



What are the tax implications of owning out-of-state real estate?



If you are about to purchase out of state real estate, you should be aware of the tax implications involved. For example, you will have to pay property taxes at the rate of the county in which the property is located. This means that you will have to become aware of how the county handles the taxes and then start paying them on an annual basis. Besides paying property taxes, you should not have to worry about any other tax implications.

 



What are the tax implications of selling a home below market value to family?



If you are selling a home to family for less than market value, you will not have to worry about any taxes on the sale if you have lived in the property for more than two years. Regardless of how long you have lived in the property, you will not be able to claim a loss on the sale of the property when you file your taxes. You will simply have to take less money, and you will not get a tax deduction from it. 



Is there tax on interest earned from a loan on a second home?



You may have to pay tax on interest earned from a loan on a second home. If you are the lender and you are receiving interest income from someone who purchases a second home, then you would have to pay income taxes on the amount of money that you receive. The tax that you will have to pay will be based on the amount of your total income. Depending on what your total income is, you will be lumped into a particular tax bracket. This will tell you how much of a percentage you will have to pay on the interest earned.

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