If you own a vacation home, you may be wondering how it is taxed differently from your primary residence. Vacation homes are considered a luxury item and are subject to different tax rules than your primary residence. Here’s what you need to know about how vacation homes are taxed.
Property Taxes
Just like your primary residence, your vacation home is subject to property taxes. The amount of property tax you pay on your vacation home depends on the value of the home and the local tax rate. You can deduct property taxes on both your primary residence and vacation home on your federal income tax return.
Rental Income
If you rent out your vacation home for part of the year, any rental income you receive is taxable. You will need to report this income on your federal income tax return. However, you can also deduct expenses related to renting out the property, such as advertising, cleaning fees, and repairs.
Personal Use
If you use your vacation home for personal use for more than 14 days a year or more than 10% of the days that it is rented out (whichever is greater), then it is considered a personal residence and not a rental property. This means that you cannot deduct rental-related expenses but can deduct mortgage interest and property taxes on Schedule A of Form 1040.
Selling Your Vacation Home
If you decide to sell your vacation home, any profit from the sale is subject to capital gains tax. The amount of capital gains tax you will owe depends on how long you owned the property and how much profit you made from the sale.
- If you owned the property for less than one year, any profit from the sale is taxed as ordinary income.
- If you owned the property for more than one year, any profit from the sale is taxed at either 0%, 15%, or 20% depending on your income level.
In Conclusion
Owning a vacation home comes with its own set of tax rules. Property taxes, rental income, personal use, and capital gains tax are all factors to consider when deciding if a vacation home is right for you. Be sure to consult with a tax professional to ensure you are meeting all of your tax obligations and taking advantage of any available deductions.