Tax Laws for Second Homes in the US

While you may decide to buy a second home for yourself, n important consideration, which may affect your decision, is that of the tax laws. With the rapid rise in real estate prices, along with a transient growth in the allied sectors, many people have started opting for second homes. In fact the demand for second homes has gone up manifolds in the last few years. A growing trend in this sector has been that of owners utilizing their equity in the first property, to make for the down payments in the second home.

While you are opting for second home, you need to take into account, tax considerations as well. Now, the most important aspect, as far as calculating tax on the property is concerned, is that of the purpose for which, you are buying the second home.  If you are buying the property for your own residential purpose, then the tax applicable would be different from that if you bought the property for rental purpose.

If your property is not rented out for more than 14 days in a financial year, then it would be considered to be a residential property of the owner and not a rental property.  As it is, property tax is deducted on your second home. Similarly, interest on mortgage is also deducted on your second home.

In case if you use the second home, for rental property, then in that case, the following deductions are available:

1. Depreciation on property
You are entitled to make provision for deduction on your rental property.  This amount of depreciation is allowed as deduction, for the calculation of tax.

2. Mortgage interest deductions
As a rental property holder, you are entitled to a deduction on the amount, which you have paid as interest for the mortgage on the rental property.

3. Deduction on Insurance premium paid
Deduction is also allowed on the amount of premium paid for the insurance of the property. However, it only covers the premium paid in the relevant financial year.

4. Deduction on Repair works
As per IRS guidelines, a holder of a rental property is entitled to tax deduction on the value of repair works, which have been carried out on the rental property.

5. Deductions on legal expenses
You are also entitled for deduction on the amount paid by you in the form of legal expenses on the rental property. So, the fees that you have paid to your real estate attorney, is also eligible for deduction, provided, such expenses have been carried out in the relevant financial year.

While a second home may be a very profitable venture, it is very important for you, to decide, the purpose of buying the property. Most times, people buy a second home, mainly for the purpose of putting it up on rent. However, before you make any decision, it is always better, to consider the tax aspects.