Weighing the Costs of Property Taxes When Buying a Vacation Home

Alexis Smith-Frady


The thought of owning a vacation home is exciting, but it doesn’t come without a cost. In addition to taking out a second loan and funding ongoing maintenance and repairs, you will have an increased tax liability when you own a second property. These costs are worth considering, and once you understand what you’re signing up for, you can shop for houses for sale in Anna Maria Island with greater confidence and clarity about what will be expected of you before next April.

1. What expenses can I write off?

What expenses can I write off?
As with any property you own, you can write off mortgage interest and property taxes when you file your tax report each year. Keep in mind that there is a limit to how much you can write off between both properties you own. For mortgage interest, you are limited to writing off the amount you pay on up to $750,000 of debt each year. If your loans were administered before December 15, 2017, this amount increases to $1 million. For tax purposes, this law applies not only to cabins in the mountains or cottages on the beach but also to RVs and boats. The IRS defines a second home as any facility with sleeping, cooking, and bathroom facilities. When you file your taxes, you’ll have to choose which of your two homes to designate as your main home and your secondary home.

As for property taxes, you are limited to writing off $10,000 per return or $5,000 if you are married but filing separately. In some cases, individuals who claim property taxes on their first home are ineligible to write off property taxes on their second home. These situations are complex, and your CPA can offer further insight and clarity. Also, keep in mind that if your mortgage is a higher amount than the fair market value of your Anna Maria Island real estate, you may be limited on how many deductions you can take out.

2. What if I rent out my vacation home while I’m away?

What if I rent out my vacation home while I’m away?
This changes your tax situation, but it depends on how many days you rent the property out each year. First things first, if you rent your property out for less than 14 days each year, you are not required to report the income on your taxes. However, you cannot claim any further deductions besides your mortgage interest and property taxes (with the same limits discussed in the preceding section).

Things are much different if you rent your home out for more than 14 days each year. For starters, you must report the rental income on your taxes when you exceed 14 days in one year. However, this also opens the door for you to claim many more deductions. You can write off your home’s utilities, repairs, and maintenance on a prorated basis. You can also claim certain business expenses, such as the fee you’ll pay for professional cleanings, a communications assistant to help you interact with guests, and the property manager who will help oversee your home while you’re gone. Also, in this scenario, your mortgage interest will be deducted from your rental income as a part of your expense write-offs rather than being written off as a general tax deduction. Furthermore, you can claim depreciation in this scenario since, by definition, you are using your home as an investment property.

3. What else should I know about listing my home as a vacation property?

What else should I know about listing my home as a vacation property?
Depending on the local HOA’s rules, you might need permission before listing your home as a rental property. In some cities and states, a license is required. Airbnb’s policy states that you may be assessed fines or prohibited from listing in the future if you list an unauthorized property.

4. What other tax obligations may present themselves?

If you sell your vacation home and make any money off the transaction, you’ll have to report this income on your return, and you’ll likely pay capital gains taxes. If you have owned the property for less than one year when you sell, you’ll pay short-term capital gains taxes. If you have owned the property for more than one year, you’ll be liable for long-term capital gains taxes. You also cannot deduct a loss on the sale if it doesn’t go for the amount you hoped. However, you can claim a loss if you rented the home out for profit. Also, you can attribute a maximum of 28% of the gain to depreciation. Lastly, if your second home was your main home for two out of the last five years, and the five-year period ended on the date of the sale, you can exclude up to $250,000 from any gain you earn on your sale.

5. For tax purposes, is there a difference between a vacation home and an investment property?

The IRS defines a vacation home as a property where you reside on a part-time basis. On the other hand, an investment property is a home that you buy for the sole purpose of generating income. These properties are occupied by guests or tenants most of the year. How you define your property affects what expenses you can write off. For example, if you purchase an investment property rather than a second home, you can write off the property’s depreciation each year.

Work with a talented real estate professional

Alexis Smith-Frady is an expert when it comes to Florida luxury coastal living. She first moved to the Sarasota area several years ago, and she fully immersed herself in the local community as well as area market trends. She takes time to get to know each buyer or seller who she works with so that she has a clear understanding of their goals. When you’re ready to start shopping for luxury Anna Maria Island real estate, make sure Alexis is one of your first calls.


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