Vacation Home = Tax Haven?
Depending on where you live your vacation home may be a two-edged sword: fun and profit. If you have it rented out a good portion of the year then there is a good chance that you will have self-funded, profitable money machine in the making – right? Well, maybe there’s something that might have slipped your mind. This is the taxman.
The Tax Man Cometh
In most areas if you make a dime on your vacation home you have to claim it. So if you make $10,000 there’s a good chance that the government is going to want a chunk of that. And if you are in a high tax bracket as it is that $10K may put you into another bracket which could clear away all your glittery profit.
However, here’s where the good part begins again. That’s because your vacation home is a business and a lot of what you pay for to keep it going (See my last posting) may be tax deductible. In fact, if you make your $10K and it cost you $15k in mortgage payments, caretaking expenses, upkeep, a new deck, etc. you may find yourself with a refund come the spring time.
No Fun, No Tax Break
Now here’s some strange but good news: To claim a tax deduction on a second home in the U.S. you must also have enjoyment from it. In other words, for a second property to qualify for the home mortgage interest deduction the owner must use it for personal habitation during the year.
Let’s say you have a second home rent out it out all the time and never use it. If that is the case the property does not qualify as a second home for the purpose of a home mortgage interest deduction. The IRS will see it as rental property if it is rented, or investment property if it isn’t rented. The numbers are like this: You must use it for 14 days or 10% of the time whichever is greater.
If you have a home in Canada you can almost write off the whole amount even though Canadians can’t write off their personal home mortgage. So the second home is actually a tax deduction if used properly.
For the best advice, contact your accountant and he or she will give you the goods on this information. Mine has set up a great strategy for White Point Manor.
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