GMAC Real Estate Four Tax Categories for Second Homes
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Four Tax Categories for Second Homes

Takeaways

  • Never renting, and no personal use are both easy to define categories.
  • The category when mixing personal use and earning rental income on a second home depends on days used against days rented.
  • For mixed use properties learn the differences and benefits for each category and plan your second home usage accordingly.

Did you know?

  • The average vacation second home owner spends around 40 nights at their property.
Take a bite out of your taxes with a second home. If your second home is a purely recreational investment, your tax options are simple. You can deduct mortgage interest and probably property taxes, but not expenses. If the second home is used for any income generation through rental it’s important to understand the four tax categories your second home will fall under. A thorough knowledge of these categories can help you make decisions on how much personal use the second home should get compared against how often it is rented out. And remember even though a second home isn’t quite a tax shelter, careful juggling of personal and rental days can provide tax savings.

One: Fewer than 14 Rental Days in the Year

If your second home was rented for fewer than 14 days over the course of the year any rent is completely tax-free. The standard deductions of mortgage interest, property taxes and uninsured casualty loss still apply.

Two: No Personal Use of the Second Home

The other side of the second home coin is the property that is never occupied or used by the owner. This real estate is considered rental property and requires filing a Schedule E with your tax return reflecting income and expenses related to the home.

The upside is almost any expense can be deducted. These include mortgage interest, property tax, insurance, utilities paid, repairs, depreciation and even any applicable homeowner association fees. The deductions extend to travel expenses to inspect and repair your second home.

The typical result of these deductions is a tax loss, and if you are a material participant in managing and operating your rental real estate you can deduct a portion of your tax loss from the second home.

Three: Yearly Personal Use Over 14 Days or 10% of Days Rented

This category kicks in when you extensively use the second home yourself, but do rent the property more than 14 days. Renting the second home more than 14 days requires filing a Schedule E, but unlike the total rental example above losses can’t be used against your ordinary taxable income. A positive is the losses do become “suspended” and can be used in a future tax year if your category changes.

On the Schedule E deduct expenses in this order – mortgage interest, property tax, uninsured casualty loss, operating expenses and depreciation. If the first three items exceed rental income they can be itemized on a Schedule A.

Four: Yearly Personal Use Less Than 15 Days or 10% of Days Rented

This final tax category is very advantageous for second home owners because there’s no limit on tax loss against ordinary income, unlike category three. The Schedule E follows the same protocol as category two, no personal use of the second home.

In this category if your second home is rented for days equaling six months of the year, you could use your home 18 days and still fall under this category. The catch is the IRS requires a rental activity profit at least three out of five years to remain in the category.

Search for Second Homes for Sale

To search for a selection of second homes for sale, please visit lifestylehomesearch.com, or visit the website of a GMAC Real Estate Office that serves the area where you'd like to buy a second home. To learn more about buying Second Homes or Vacation Homes, explore the rest of this section, or contact a GMAC Real Estate Agent.