How will buying a vacation home affect my taxes?
Do you own a vacation home? Do you dream of purchasing or building a vacation home, maybe you’re considering buying a vacation home as an investment? Most people dream of owning a vacation home, the opportunity to escape to a beautiful location is always a tempting one. If you are considering buying a vacation home, you’ll find that the way you use your property will affect the way you file your taxes and even the types of tax deductions that are available to you.
A home that is purely used as a vacation residence will require different tax filings than a home that’s primarily used as a rental for tenants. If your house is intended for both personal use and as a rental property, you’ll want to be prepared to account for how much time is allocated to each type of use. Additionally, you will need the proper legal documents and agreements properly authored by a trusted attorney.
Property classifications
Personal use is the main reason to even consider a vacation home, but did you know that it can also make you money? Renting out the home often changes its classification under your state’s tax laws, so be sure to always keep that in mind. Generally speaking, if you occupy the home for personal use for at least 14 days or for 10% more than you rent it out for, you may still consider it as a personal second residence. If you decide to rent out your home for more than 14 days per year and your personal use does not balance this out, it may become classified as a rental property, which as mentioned above will most likely change its classification under your state’s tax laws.
Mortgage-interest
If you use the house as a second home rather than renting it out as business property, interest on the mortgage will be deductible just as the interest on the mortgage of your first home is. You can write off all of the interest you pay, on up to $1.1 million of debt secured by your first and second homes that were used to acquire or improve the properties. (A total of $1.1 million of debt, not $1.1 million on each home.) For more info see IRS’s Publication 936 (2019), home mortgage interest deduction webpage (irs.gov/publications/p936)
From a tax perspective, the interest deduction is one in a list of many reasons you may wish to keep the home classified as a personal residence. Many complex rules still exist around what you can deduct and when, working with an experienced tax professional or attorney may help ensure that you manage your property in a way to maintain the benefits you prefer. If you do end up deciding to make your vacation home rental property, this may help it pay for itself. It is important to weigh the pros and cons carefully before making your final decision.
Renting out the place
Lots of second-home buyers rent out the property part of the year to get tenants to help pay the bills. As stated above, different tax rules apply depending on the breakdown between personal and rental use.
If you rent the place out for 14 or fewer days during the year, you may be able to keep the rental income tax-free. The house is considered a personal residence, so your deduction of mortgage interest and property taxes fall under the standard rules for a second home.
If you rent the place out for more than 14 days, then you must report all rental income, you also get to deduct rental expenses, and that gets complicated because you’ll need to allocate costs between the time the property is used for personal purposes, and the time it is rented.
Get help from an experienced legal team
The right legal team will help make sense of the tax requirements and help you get the most out of a vacation home from a tax perspective. The right legal team can also help you identify ways to lower your taxable income and claim all the tax benefits you’re entitled to. Look for a legal team that has lots of experience, especially in complex tax situations like self-employment, business ownership, and multi-property ownership, look for a team like Lubliner Law.
The attorneys at Lubliner Law are experts in drafting both long-term and short-term leases. These agreements can be intricate, specifying security deposits, payment terms, as well as define termination and early termination of the lease. We also can review your HOA or Condo docs, where applicable to ensure that the lease meets any community association regulations (including leasing duration and ensuring leasing is allowed, as some associations restrict leasing in the first year, for example). There are many obligations that a landlord assumes regarding maintaining the property, and we can ensure that your lease is crafted in a way that meets both the laws and your preferences and requirements of tenants.
Disclaimer: Lubliner Law can assist with the legal aspects of real estate contracts/transactions, but we always recommend consulting your tax advisor to advise you on your best legal course of action, as laws vary for each locale and may change from time to time.
FAQs
Florida's 6% state sales tax, plus any applicable discretionary sales surtax, applies to rental charges or room rates paid for the right to use or occupy living quarters or sleeping or housekeeping accommodations for rental periods six months or less, often called “transient rental accommodations” or “transient rentals ...
How does a vacation home affect your taxes? ›
You can deduct the same expenses as with your primary residence: property taxes and mortgage interest. You could even deduct home office expenses if you meet the criteria. And here's some great news, the IRS will even let you rent your vacation home and keep the income tax-free.
Can a business write off a vacation home? ›
If you secured financing to buy a vacation rental property, the interest payments might be deductible from your taxes as a business expense. To claim the mortgage interest deduction, you must use the home more than 15 days a year of more than 10% of the number of rented days.
Is residential rental income taxable in Florida? ›
Do I have to pay tax on rental income? Florida doesn't have any state income state, so you don't need to be concerned about that. Federal tax is still applicable, however, so you'll have to pay federal income tax on your rental income.
Is there capital gains tax on a vacation home? ›
Your profit will be treated as a capital gain and taxed accordingly. If you've owned the property for more than one year and never rented it out, you'll owe federal capital gains tax at the lower rates for long-term capital gains. The maximum rate for long-term capital gains is 20 percent.
What is capital gains tax on vacation home? ›
When you sell a vacation home, rental, fix-and-flip, or any second property that is not your primary residence, you will typically be responsible for paying capital gains taxes on any profits you make, at a rate of up to 20%, depending on your tax bracket. But you may be able to mitigate those taxes.
How to avoid paying taxes on a vacation home? ›
How To Reduce Capital Gains On Your Vacation Home?
- Establish Your Vacation Home As Your Primary Residence. Federal (and most state) laws allow for tax breaks when selling your primary residence. ...
- Complete a 1031 Exchange. ...
- Leave The Property To Heirs.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
What is the IRS rule for second homes? ›
For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.
Can a second home be a business expense? ›
Because the home is considered a business, you can deduct rental expenses, including mortgage interest, property taxes, insurance costs, property manager fees, utilities, and property depreciation.
Can you depreciate vacation rental property? Yes! As long as you own the property, it has a determinable useful life, it's expected to last more than a year, and it's used for business purposes, you can go ahead and claim depreciation.
How much can you write off on a second home? ›
Mortgage interest deductions on second homes
Up to 100% of interest paid on up to $750,000 of debt can be written off on your taxes.
How does the IRS know if I have rental income? ›
The IRS has a number of ways to determine whether or not you have rental income. A few of these include reporting by third parties, reported income and expense discrepancies, audits and reviews, and public records.
What rental income is not taxable? ›
Nontaxable income won't be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer.
Does Vrbo collect taxes in Florida? ›
Florida. Note: Discretionary County Surtax is state tax surcharges required by various counties that Vrbo will also be collecting and remitting. These rates vary between 0.5-2%.
Is there a tax on short-term rentals in Florida? ›
Florida's vacation rental tax requirements
State sales tax: 6% of the rent charged to guests, collected by the host and remitted to the state. Local option tourist tax: Ranges from 1-5% depending on the county, collected by the host. Discretionary sales surtax: 0.5% or 1% in some counties.
What is the tax on Airbnb in Florida? ›
Florida Airbnb Taxation
Airbnb collects these taxes on behalf of their hosts and remits them to the state. This includes the Florida Transient Rental Tax of 6%, Florida Discretionary Sales Surtax of 0.5-1.5% and the County Tourist Development Tax of 2-5% for 24 counties.
Do Florida residents get a discount on property taxes? ›
Property owners in Florida may be eligible for exemptions and additional benefits that can reduce their property tax liability. The homestead exemption and Save Our Homes assessment limitation help thousands of Florida homeowners save money on their property taxes every year.
What is property tax for residents in Florida? ›
Property taxes in Florida are implemented in millage rates. A millage rate is one-tenth of a percent, which equates to $1 in taxes for every $1,000 in home value. A number of different authorities, including counties, municipalities, school boards and special districts, can levy these taxes.
