When you buy a second home, you buy it so that you can have a place to relax, unwind, and escape from your normal life. However, you can gain more benefits from your second home if you know to take advantage of some tax benefits.
Mortgage interest paid on up to $1.1 million in debt on your first and second homes is fully deductible. Typically, this rule only applies if you treat your second home as a home and not a rental property. However, some mortgage interest may still be deductible if you occasionally rent out your second home. To benefit from this deduction, you must use the property for 14 days or more than 10% of the number of days you rent it out a year, whichever is longer.
You can take up to $500,000 in profit from the sale of a home tax-free if it is your primary residence and you meet the two-year ownership and use requirement. Typically, you do not get the same tax benefit from the sale of a second home. People can take advantage of this rule by converting their second home to their primary residence before the sale, thus reaping the tax-free profit.
In 2009, Congress added a few more restrictions to limit the amount of tax-free profit you can take from a second home. Now, a portion of the profit from the sale of a second home is taxable. The portion is determined by the ratio of the amount of time after 2008 you treated the residence as a second home or rental property and the amount of time you owned it.
Buying a second home can offer many benefits, but to maximize the value of your investment you should work with a lawyer to make sure you are not overlooking any potential legal, insurance, financial, or tax problems or opportunities. A Personal Family Lawyer® can help you ensure you meet the requirements, so you can reap all the benefits of owning a second home.
This article is a service of Levi Alexander, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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