The American Dream of buying a home has undergone a fair amount of change over the last 50 years, expanding to second, or vacation, homes. But these cottages on the lakeside, the cabins in the mountains, and the huts on the beach often sit empty 90% of the year while their owners are banking time for the next vacation—and footing the bill for the mortgage and 澳洲幸运5官方开奖结果体彩网:property taxes.

There is, of course, an alternative to letting your vacation home collect dust when you can't be there: Rent it to other people looking to enjoy some time away from work. While renting can be lucrative, you'll need to consider the tax implications.

Affording a Second Home

Buying and maintaining a 澳洲幸运5官方开奖结果体彩网:secondary residence is an enormous financial decision. A second home has all the costs of your 澳洲幸运5官方开奖结果体彩网:first home and often more but without the easy write-offs f🍨rom the 💙IRS.

If you're 澳洲幸运5官方开奖结果体彩网:considering buying a second home, one of the first steps is to decide whether you will finance the purchase with a mortgage or if you will pay cash. To help you decide, use a 澳洲幸运5官方开奖结果体彩网:mortgage calculator to research interest rates from lenders in🍒 the area where your vacation property is located. Then, once you've gathered estimates of the total cost of your monthly mortgage payments, go over your financials to see if it makes more sense to take out a mortgage or to pay cash.

If you are set on 澳洲幸运5官方开奖结果体彩网:getting a vacation home but don't have the capital for an all-cash purchase, be aware that the IRS has closed the loophole in which you could use a second mortgage to purchase a separate 澳洲幸运5官方开奖结果体彩网:investment property while still deducting your payments as personal mortgage interest. If you intend to borrow for a second home, you will have to take out another mortgage that allows for 澳洲幸运5官方开奖结果体彩网:tax-deductible interest.

The IRS on Vacation Home Investments

If you own a home and rent it for fewer than 15 days, you don't have to 澳洲幸运5官方开奖结果体彩网:report the income. However, the IRS considers a second home an investment property if you spend less than two weeks in it and then attempt to rent it for the rest of the time. It is important to remﷺember that the demand for your cabin in the woods may only come at peak times—the same period you would probably want to use the property yourself. 

Second homes seem to be a gray spot for the IRS. All rental losses are "passive losses" or "澳洲幸运5官方开奖结果体彩网:hobby losses." These can only be written off against income from other 澳洲幸运5官方开奖结果体彩网:passive activities like other rentals, a private partnership you don't help operate, or an 澳洲幸运5官方开奖结果体彩网:S-corporation. Passive losses that you can't use are carried forward until you sell the vacation home. When you sell the property, you can use the past losses to offset any gains. If you have additional passive loss write-offs after the sale, you can claim them against regular income.

As of the IRS's latest guidance for the 2023 tax year, you can deduct up to $25,000 a year, if:

• Your adjusted 澳洲幸运5官方开奖结果体彩网:gross income is less than $100,000 
• You actively participate in the management of the property

This 澳洲幸运5官方开奖结果体彩网:tax break vanishes at $150,000 澳洲幸运5官方开奖结果体彩网:adjusted gross income (AGI) even though most people who can afford to buy a second home will have an AGI far above these numbers. If your AGI is between $100,000 and $150,000 you qualify for half the 澳洲幸运5官方开奖结果体彩网:deduction. Active participation is the biggest challenge. You can use the yearly deduction if you or your spouse want to become a qualified real estate professional and actively manage the property posting the passive losses.

Be warned, however, the IRS is not likely to believe that you hold a full-time job and moonlight as a 澳洲幸运5官方开奖结果体彩网:property manager. You will need a detailed journal on why, when, where, and what you are𝔍 doing as a property manager in order to prove your case and take the deduction.

Selling a Vacation Home

Properties in popular vacation areas usually tend to see higher-than-average appreciation, so at some time you may want to cash out and sell. The length of time you have owned a vacation home affects your capital gains tax. If you sell before a year has passed, you will be subject to the short-term capital gains rate. If you sell after a year, your federal tax will be calculated at the long-term 澳洲幸运5官方开奖结果体彩网:capital gains rate.

You can, however, do a bit of a dodge if you are willing to completely relocate. If you sell your primary residence with the $250,000 per person tax-free deduction and move into the vacation home and declare it your new primary residence, you will be able to use the $250,000 ($500,000 for couples) 澳洲幸运5官方开奖结果体彩网:exemption again—providing you live at the former vacation home for two years.

Unfortunately, this strategy is often only practical for the 澳洲幸运5官方开奖结果体彩网:self-employed or retired. There are also other restrictions on the use of the capital gains exclusion for vacation home♈s that have been converted to primary residences. 

Nearly 52% of Americans carry some form of life insurance according to the latest figures as of January 2023.

Tips for the Second Homeowner

If you own a second home for the purpose of renting it, and you have an AGI under $150,000, then get in there and start actively managing it. This means that you won't be able to use an agent to find tenants. You will be arranging repairs personally, but it will give you passive losses to write off.

If active management doesn't appeal to you or your AGI is too high, spend more time at the cabin and turn it into a mixed-use property rather than an investment property. This means t🐬hat the taxes change with the change of designation—mainly that you can't use passive losses. But you will be able to claim a percentage of the mortgage interest and property taxes as deductions against your income tax.