Are you stressed about whether it is a good financial move to buy a vacation home? With today’s housing prices, it can be scary. However, there are a number of ways that you can lessen this financial impact. Here are a few things our TFG CPAs recommend to help make it work for your pocketbook.
Rent out your vacation home for two weeks or less
A vacation home, in the eyes of the IRS, is not a rental property or an investment property. Rentals have very different rules than a vacation home does, and rental income is reported on Schedule E. That being said, the IRS allows you to rent your vacation home out for a short period of time (14 days or less) without requiring you to report the income, at a fair rental price. View IRS Publication 925 for additional information. Taking advantage of this caveat while you are not using your second home may help to offset some of the financial burden. Perhaps think about renting your home out strategically during specific times of the year, or around large events or holiday weekends.
If you rent your vacation home out for more than those 14 days, the IRS will see you as a landlord and you will be required to report the rental income. For more information visit HERE.
Mortgage Interest Deduction
For most people, owning a home is their biggest investment, and the biggest tax break they can get from owning that home comes from deducting mortgage interest. You are allowed to deduct mortgage interest on a second home as well, but this only benefits you if you itemize deductions. The Tax Cuts & Jobs Act reduced the amount of mortgage debt you can use in this calculation however, and you are not able to write off interest on balances of more than $750,000. This means, for example, if you already have a $500,000 mortgage, you can only get a tax break on $250,000 of a second mortgage property.
Property Tax Deduction
What is the property tax deduction limit? In 2023 and 2024, the SALT deduction allows you to deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes, either state and local income taxes or sales taxes. Not all property tax payments qualify, and be sure to deduct your property taxes in the year you pay them. Use Schedule A when you file your return, that’s where you figure your deduction. This means you’ll need to itemize your taxes instead of taking the standard deduction. Be sure to talk with your TFG CPA regarding which property tax payments will qualify, and how you can properly claim this deduction.
Home Office Deduction
If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions. But employees who work remotely can’t deduct home office expenses under current federal tax law. To qualify for a deduction, you must use at least part of your home regularly and exclusively as either:
- Your principal place of business, or
- A place to meet with customers, clients or patients in the normal course of business.
Keeping track of indirect expenses is time-consuming, we recommend you take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction. Explore your other option HERE. Taking advantage of this deduction for your primary residence may help to free up some money you could put toward your second home, or your vacation home.
Reach out to us: Buying a second home is a daunting task, and with the current housing market, it may seem almost impossible. Our TFG CPAs and Financial Advisors can help you make this as easy as possible, and show you things you may not have known about to help you make it work. Contact us toll free at 855-542-7537 or at CPA@fuoco.com.
