Purchasing A Second Home
The current slump in the vacation market has provided an opportunity to acquire one’s fantasy vacation home at a good deal. Purchasing a second residence, if it can be used as a vacation home, has tax advantages, depending on whether it is treated as personal property, rental property or as a hybrid of both.
A second home may be considered a house, apartment, condo, stock in a co-op, house truck, mobile home or a boat even. If another residence is rented out for fewer than 15 days during the taxable year, it qualifies as personal property, and the taxpayer or his or her family may utilize it normally as they wish. Rental income is not reportable for tax purposes.
For taxpayers who itemize deductions, the home loan interest obligations and property fees are fully deductible, although there can be an overall limit on the home loan interest deduction (discussed later). In this particular category, the taxpayer rents the property and uses it only sometimes personally. Personal use is limited to 14 days a year or 10% of the total days it really is rented out, whichever is greater.
The property will not qualify as a residence, but is normally considered investment property, provided there’s a profit purpose for owning the house. The portion allocated to investment is deducted on Form 1040, Schedule E, and could produce a taxable loss, which is at the mercy of the passive activity loss restrictions (discussed later). The part allocated to personal use, except for real estate casualty and fees loss, is not deductible. NOTE: That portion of mortgage interest allocated to personal use is not deductible since the property does not meet up with the second residence definition (discussed later).
This category consists of the personal use of another residence for longer than 2 weeks per season or longer than 10% of the total times it is rented, whichever is better. The allocation between investment and personal use is equivalent to the local rental category, except the part of mortgage interest allocated to personal use is deductible, because the second home requirements have been fulfilled.
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Investment expenditures, however, are deductible only to the level of income, and any disallowed surplus deductions are transported to future years forward. A category is determined by the amount of days per year a taxpayer uses the residence or rents it out. This determination can each year differ. Two tax planning variables is highly recommended in choosing a category: the “passive activity loss” limitations and the “mortgage debt ceiling” limitations.
For cross property, the amount of deductible losses may not exceed local rental income. On the other hand, rental property loss enable you to offset other income, at the mercy of the passive activity loss procedures. In general, unaggressive activity losses can’t be used to offset income or benefits from non-passive activities (such as wages, salaries, interest, dividends, and benefits from the sale of stocks and shares and bonds).
5,000 deduction for rental activity losses. Losses that are not presently deductible are transported forward and are generally open to offset any benefits when the house is sold (although for taxpayers with multiple real estate activities, the rules are more complex). 150,000 cannot deduct local rental losses currently and could want to classify a second home as either personal or as a cross types property to fully utilize their mortgage interest deduction. 150,000 must compute the passive reduction deduction open to them before deciding the most advantageous category. 1,000,000 of debt paid or incurred for the acquisition or improvement of a first or second residence, if that debts is secured by either home.