Owning a second home can provide a great place to take a vacation, meet with family, or bring in an extra income when you rent it out. You may want it as an investment property to offer it as a beach house rental, a vacation rental, a summer rental, etc. Whatever your reason for it, you want to understand the tax implications before buying to help with tax planning.

The Uses of a Second Home

How you use the home determines the tax benefits you have available. Some rules will also affect what you can deduct. When you buy a second home, local laws may affect how you can use it. Bankrate mentions that in New York City, you cannot rent your home as an Airbnb unless you live in it for more than 30 days or rent it out for a minimum of that same time. Some areas will not let you rent a home for less than 90 days—and the renter must be pre-approved.

A second home is a personal residence if you do not rent it out more than 14 days per year or live in it less than 10 percent of the days you rent it out. When rented out for more than 14 days, the Internal Revenue Service (IRS) considers it a rental home.

Rental properties give you the advantage of deducting the expenses of owning and maintaining the house, but you also must report any income gained from it—if you live in it for more than 14 days or 10 percent of the time it is rented. In contrast, you do not need to report money gained from rental fees if you rent it out for 14 or fewer days—even if you charge more than $4,000 a day.

Turbotax says that when you stay in the house for repairs or fix-up days, they do not count toward personal use days. The negative side of limited use of your second home is that you will forfeit the opportunity to write off a portion of your mortgage interest when it is not being used.

Mortgage Interest

The interest you pay on your mortgage for a second home used personally is the same you would pay for your primary residence. The IRS says that if you use a home purchased before Dec. 15, 2017, you can subtract mortgage interest on home loans up to $1,000,000 if married filing jointly—or half that if you are single.

Homes purchased after Dec. 15, 2017, allow you to deduct the interest on loans up to $750,000 if you are married and filing jointly. Singles and those married filing separately are limited to $375,000.

The Federal Estate Tax

When you sell a home—primary or secondary—you can claim the federal estate tax exemption. In 2023, the exemption amount is $12,920,000 per person. A couple can claim an exemption of $25,840,000.

Every state also has an exemption amount, but some states have other taxes that must be paid when you inherit a house in another state. States may also have an estate tax, but some have an additional inheritance tax. The estate tax is usually due within nine months after the owner’s death.

Forbes mentions that state taxes for non-residents are sometimes different than those for residents. When considering your taxes, some states consider all your assets worldwide and then tax you proportionally according to your assets in that state.

The Property Tax Deduction

The money you pay annually for property taxes is still deductible—but only up to a limit. You can deduct the property taxes you pay on your second home—and all your homes—but you must limit the total deduction each year to $10,000. Singles and married people filing separately are limited to a $5,000 deduction.

The Home Equity Loan Interest Deduction

It used to be that when you had a home equity loan, you could deduct the interest on it, regardless of how you used the money. Investopedia says you can only deduct the interest now on a home equity loan when you use the money to buy a home, build one, or modify it.

The interest on a second home can only be deducted from your taxes when you have a mortgage on that home. When you take out a mortgage to buy your second home from the equity in your first home, the interest is not deductible. The interest limit you can deduct on home equity debt and home loans is up to $750,000 in total debt.

Passive Losses

Real estate losses are considered passive losses, which are not usually tax-deductible. Turbotax says that you may be able to deduct such losses if your adjusted gross income is less than $100,000. When you earn less than that, you may be able to deduct up to $25,000 in losses.

How a Second Home May Affect Your Estate Plan

After buying a second home, you could reduce future tax liability by transferring the home to a qualified personal residence trust (QPRT). Fidelity says that when you set up a QPRT, which is an irrevocable trust, you choose how long you want to continue living in the house.

How long you live in the house, TrustandWill says, should be before you are likely to die. If it occurs afterward, the house will revert into your estate and then be subject to estate taxes. Once that period ends, any remaining interest belongs to the beneficiaries. The property transfer is considered a gift and can be subtracted from your federal gift tax—minus the time you live in the house.

Before buying a second home, talk to a tax and financial advisor for tax advice to learn how it will affect your finances. The tax impact could be significant, but an advisor can help you save money with good tax planning.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.