If you own a vacation home, you may be wondering what expenses you can write off on your taxes. While owning a second home can be a great investment and source of relaxation, it also comes with additional financial responsibilities. However, with the right knowledge and planning, owning a vacation home can also provide significant tax benefits.
What is a Vacation Home?
Firstly, it’s important to understand what qualifies as a vacation home for tax purposes. According to the IRS, a vacation home is defined as any property that is used for personal use and is not rented out for more than 14 days per year. This means that if you rent out your vacation home for more than 14 days per year, it will be considered rental property instead of a vacation home.
Mortgage Interest
One of the biggest tax deductions for vacation homeowners is mortgage interest. As with your primary residence, you can deduct the interest paid on the mortgage for your vacation home. This applies to mortgages up to $750,000 if you bought your second home after December 15th, 2017.
Example:
If you have a mortgage on your primary residence of $400,000 and a mortgage on your vacation home of $500,000, you can deduct all of the interest paid on both mortgages as long as they do not exceed $750,000 in total.
Property Taxes
You are allowed to deduct property taxes paid on both your primary residence and your vacation home. However, there is a limit to how much you can deduct in property taxes each year. The new tax law limits the deduction to $10k per year for state and local taxes including property tax.
Example:
If you pay $5k in property taxes on your primary residence and $8k in property taxes on your vacation home, you can only deduct $10k in total.
Repairs and Maintenance
While you can’t deduct repairs and maintenance costs for your primary residence, you can deduct these expenses for your vacation home. This includes things like fixing a leaky roof, repainting the exterior, or replacing an appliance. However, if you make improvements to your vacation home that increase its value or extend its useful life, those costs must be added to the property’s basis and depreciated over time.
Example:
If you spend $5k repairing the roof of your vacation home, you can deduct the entire amount as a repair expense.
Rental Income
If you decide to rent out your vacation home for more than 14 days per year, then it becomes rental property instead of a vacation home. This means that any income generated from renting out your property must be reported on your tax return. However, with rental property comes additional deductions such as depreciation and expenses related to managing and maintaining the property.
Example:
If you rent out your vacation home for 30 days per year and generate $10k in rental income, you must report that income on your tax return. However, you can also deduct expenses related to renting out the property such as advertising fees or cleaning costs.
Conclusion
Owning a vacation home can be a great investment and source of relaxation. And with the right knowledge and planning, it can also provide significant tax benefits. Remember to keep track of all expenses related to your vacation home so that you can take advantage of every deduction available to you.