VIEWpoint Issue 1 | 2023
2023 Compliance Trends: Staying Ahead in an Evolving Regulatory E...
2023 Tax Calendar
Vacation homes offer owners many tax breaks similar to those for primary residences, as well as the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.
Homeowners can deduct mortgage interest they pay on up to $1 million of “acquisition indebtedness” incurred to buy their primary residence and one additional residence. If your total mortgage indebtedness exceeds $1 million, you can still deduct the interest you pay on your first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.
As a vacation homeowner, you don’t need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. You can deduct interest paid on a loan secured by a timeshare, yacht or motor home so long as it includes sleeping, cooking and toilet facilities.
Below are two ways to account for your vacation home:
Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property’s contract price (including any mortgage assumed or taken “subject to”), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. “Adjusted proceeds” include the property’s sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There’s no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.
Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.
Own a vacation home, or thinking about buying one? Contact our tax advisors in Michigan, Houston or Ft. Lauderdale to ensure you enjoy the associated tax benefits.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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