Taxpayer asks:
Last year, my husband came into a little money. He bought a few acres in the middle of the state and put a motor home on it. He plans to build a cabin on it. Since it’s not a second home yet can we get any tax breaks on it?
Taxgirl says:
Who says it’s not a second home? It doesn’t have to be bricks and mortar to qualify. The IRS says that a second home can also be a condo, co-op, mobile home, RV, house trailer – even a boat if it has sleeping, cooking and toilet facilities. Even that darn yurt that my husband intend to build somewhere in the Poconos would qualify.
You can also deduct “qualified residence interest” on a mortgage secured by a second home. You do not have to use the home during the year. However, if you rent it out, you must also use it as a home for at least 14 days or 10% of the number of days you rent it in order to take the deduction for home mortgage interest. There are some restrictions on the amount of interest that’s deductible – so be sure and check with your tax professional for more details.
It’s important to note that, for purposes of the mortgage interest deduction, bare land does not count.
You’ll also be glad to know that real estate taxes paid on a second home are also generally deductible.
There are some additional tax concerns if you plan to rent out the property, including how to report rental income and restrictions on deductions for mortgage interest. If you’re planning to turn your property into a rental, definitely check with a tax professional first.
Finally, at sale of the home, you will be subject to capital gains tax. There’s an exception if you convert the second home to your primary home – maybe that’s something that you’re looking at down the road. Then it will depend on how long you’ve been in the house. Doesn’t sound like you need to worry now, but just keep it in mind.
Good luck with your new second home!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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