A Second Home – Know The IRS Tax Rules For Your Real Estate Investment

Having a second home for you and your family to vacation and visit is a wonderful opportunity for wealth building as well as developing long lasting memories.
However, while vacationing allows one to drift away from the rigor of everyday life, you will need to pay close attention to the IRS Tax Rules for a real estate investment second home to make it all worthwhile.
There are great tax benefits from owning a second home, however, there are rules that you must play by to keep the IRS from knocking on your financial doorstep.
To keep yourself out of hot water, you’ll most certainly want to consult with a tax professional to get professional advice. Our intent here is to just spell out some of the basic guidelines to get your mind thinking about what you are up against if you decide that you want to own a second home.
Many people who have second homes get caught between is it really a second home or is it a rental that you vacation in every year.

Captial Gains Exemption

What if you decide to purchase a second home and then sell it down the road? One thing you’ll want to pay attention to is the capital gains exemption. This exemption allows you to exclude up to $250,000 in capital gains from being counted in your taxes (this is up to $500K if you are married) if you sell your home. You will have to have lived in it 2 of the last 5 years to qualify for this exemption.

Unfortunately, this exemption doesn’t apply to second homes – unless of course you live in it for 2 years too. (speak to your tax consultant about this strategy to make sure you cover your basis)

14 Day Rule For Renting Your Second Home

Next thing to pay attention to is the idea that many people who own second homes think about and that is to rent the home out for parts of the year that it is not being used by you. While not a bad thing to do, you can only rent it out for 14 or less days a year to have the tax benefits of a second home apply. If you go over this time frame then the home falls into an investment category and the tax ramifications are different.

From here, it is up to you to consult with a tax professional to learn if owning a second home is something you want to do.
If you decide that you want to move forward with buying a second home, make sure that you consider all of the expenses associated with owning a second home and if you need financing help, please complete the form below and we’ll get you connected with someone who can assist you.