Posts tagged as:

second-home

Ask the taxgirl: What Qualifies as a Second Home?

May 7, 2009 · 6 comments

vacation-home.jpgTaxpayer 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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Suddenly, being financially irresponsible pays off!

October 11, 2007 · 0 comments

The House Ways and Means Committee has voted to permanently remove the income tax consequences for homeowners whose debt is partially forgiven by a lender after a foreclosure. The bill is likely to pass the House and Senate, and President Bush has already spoken publicly about his approval of the measure.

Great. Now homeowners have yet another incentive to spend beyond their means – as if interest only and subprime mortgages aren’t enough.

Don’t get me wrong. I don’t love the idea of adding insult to injury. And I don’t think adding an income tax consequence to someone already saddled with debt is a terribly effective way to get out of debt. And I realize how easy it is to become saddled with debt (I say this as a homeowner with tons of student debt, trying to educate and feed three children).

But this is the thing. I have people calling my office every week to tell me their stories. And a lot of times, it’s a combination of bad choices, bad luck and bad timing. And those people I can help.

But lately, I’ve been hearing more and more of the “I bought a house that I couldn’t afford at an interest only mortgage and help, now I’m in trouble!”

The answer? Take away the tax consequences. Whereas before, debt forgiveness was subject to taxation, the bill relieves all related consequences. You can read more from my colleague at Roth PC here.

The new “tax cut” means significant loss of revenue to the Treasury. To make up for the shortfall, the committee has approved restrictions on capital gains tax benefits available to second home owners who convert their vacation homes to primary residences. In other words, to paraphrase my colleague, Congress is offering a tax break to folks who can’t pay their debts by taking away a tax break for folks who can. Interesting concept, no?

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