Taxes on Second Home
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Paying Taxes when you have a second home in Sedona Real Estate
If you own a Second/vacation home, there are several tax deductions you can take advantage of when doing your income taxes. Some costs that you can deduct include:
REAL ESTATE TAX
Property taxes on second homes, including those levied by state and local governments and school districts, are fully deductible against current income taxes. There are no limitations on the amount of real estate tax or on the number of homes for which you can take a deduction for real estate taxes
MORTGAGE INTEREST
The mortgage interest deduction has a few more rules than real estate taxes.
First The Home Has To Qualify
In order to take a home mortgage interest deduction for a second/vacation home, the home must be a qualified dwelling that has sleeping, cooking and toilet facilities.
More Than One Second/Vacation Home
You can take a mortgage interest deduction for your main dwelling and only one second home. If you have more than one home that qualify under the first rule above, you can choose which home to designate as your second home for tax purposes each year. Designate the vacation home with the largest total deductions for real estate tax and mortgage interest. See IRS Publication 936.
Loan Secured by the Property
The loan must be secured by the second home, and your name must appear on the loan documents as the person legally liable for the debt.
There is a cap on how much interest can be deducted
You are generally limited to taking mortgage interest deductions on a total of $1,000,000 in acquisition indebtedness and $100,000 in home equity indebtedness each year.
If the total of the mortgages on your primary residence and your vacation home is greater than allowed limits, your deduction will be limited. The exception to this rule is if all of your mortgages began before October 13, 1987 (which means that you have grandfathered debt), in which case all of the mortgage interest on your principal residence and one second home is deductible, regardless of the debt amount.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) rules for deducting mortgage interest are different from the rules for regular taxes.
The mortgage interest you pay on personal property (motor homes (only if used on a transient basis) or boats, for example) or for home equity indebtedness (taken out after June 30, 1982) does not qualify as deductible for AMT purposes.
For more information on mortgage interest, see IRS Publication 936: Home Mortgage Interest Deduction.
POINTS
You can deduct the points that you pay to acquire or refinance a vacation home, but you must deduct them over the life of the mortgage, rather than in the year you pay the points.
If the total mortgage debt on your primary residence and designated second residence is over $1,100,000, the deduction for points will be limited.
For more details on deducting points, see IRS Topic 504: Home Mortgage Points.
RENTING YOUR SECOND/VACATION HOME
If you rent the second home for 14 days or less, you do not pay taxes on that income. If you rent it for longer, the income must be reported but you can deduct rental expenses. If the property is held for personal use for more than 14 days, or over 10% of the number of days it's rented annually, it's considered a personal residence and you cannot claim a tax loss. You can, however, write off the full interest, partly as a rental expense, with the remainder as personal mortgage interest.
See the section on Personal Use of Vacation Home or Dwelling Unit, in IRS publication 527; Residential Rental Property, Including Rental of Vacation Homes for more information on renting your second home.
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