Your Vacation Home and Your Tax Return

Have you been thinking about buying a vacation home in the mountains or by the shore? Are you wondering about how such a home affects our tax return? Here’s some vacation home info.

The IRS defines your 2nd home as not your primary residence but you use it personally and don’t rent it for more than 14 days per year. This 2nd home can be a condo, mobile home, time-share unit, a boat or recreational vehicle. Remember, per the IRS, like your primary home, the dwelling must include sleeping, cooking, and toilet facilities. See IRS Topic 505 – Interest Expense.

So what do you get to deduct each year on this 2nd home that you don’t rent for more that 14 days?  You can deduct its real estate taxes and mortgage interest that you pay each year on your Schedule A.  Remember that if your mortgages on both homes total more than $1,100,000, there will be a limitation on the amount of interest that you can deduct.  See IRS Publication 936.

When you purchase your 2nd home, you can’t deduct all of the points paid in that year like you did when you purchased your 1st home.  The 2nd home’s points are deducted over the length of the loan.

Note: If you own more than one 2nd home (your primary home in New York, your winter home in Florida, and your summer home in Vermont. – I can dream, can’t I?), you can only deduct the mortgage interest on your New York home and one other home. The mortgage interest on the remaining home is not deductible on your tax return.

You can deduct the real estate taxes that you paid on all of your personal homes. There is no limit.

Like your primary home, you can’t deduct the utilities, maintenance fees etc on your 2nd home.

Let’s talk about when you sell this 2nd home. Often taxpayers think they can take that $250,000/$500,000 exclusion on the gain on their 2nd home. The answer is no. That exclusion amount is only for the sale of your “primary” residence. Your gain on the 2nd home will be taxable on Schedule D and if you have a loss, it’s not deductible.

There is a way to take advantage of the exclusion; however, you’ll have to do some planning. For example, you sell your primary residence and take the exclusion (see the  Home Sales Tax Webinar for the exclusion rules). Then you move into your 2nd home as your primary residence. You live there for at least 2 years (and meet the exclusion rules) and then sell it. You get to take the exclusion again. (Remember that you can take the capital gains exclusion only once every two years.)

Some folks think that you can exchange your vacation home for another and not pay tax on the gain (like-kind exchange). The courts (T.C. Memo 2007-134) recently ruled that the vacation home couldn’t play the like-kind exchange game since it was not held primarily as an investment. So if you sell your vacation home and buy a new one, it looks like you’ll pay the tax on the gain.

For further information:

IRS Publication 17

IRS Tax Topic 701- Sale of Your Home

IRS Pub 523 – Selling Your Home