Many homeowners automatically assume that they should sell their current residence if a different residence is purchased. However, the tax benefits of home ownership are not limited to just one house. Some current homeowners may prefer to keep their current residence when buying a second house and claim the available tax deductions for both properties.
The federal tax code allows deductions for two homes, as long as the combined mortgage amount is not more than $1 million. The allowable deductions for a second home are generally the same as for the first. Although tax consequences should not be the driving force behind a purchase, there are several practical reasons why a tax filer might choose to buy a second home:
Some people are sentimentally attached to their hometown but realize that their earning potential is greater elsewhere. An increase in income might justify purchasing a second residence near a new place of employment. You might even have household members who choose to stay in your hometown while you reside in the second house and commute home when possible.
A vacation home
A vacation home bought for leisure purposes qualifies as a second residence. A tax-deductible second home generally cannot be rented out to someone else, but there is an exception for a minimal amount of rental. You may rent out a vacation home for up to 14 days and still treat the property as a second residence. A favorable aspect of receiving no more than 14 days of rent is that the revenue is tax-free.
Purchase of adjacent houses
If your family is in need of a larger home, you might consider owning two adjacent houses instead. In some neighborhoods, the homes are located close together on small lots. If your household includes an extended family member who is an adult, that person might be more content a few steps away in their own abode. Even though two homes may be tax-deductible, there is a reason only one house can be considered your primary residence.
A financial gain on the sale of a personal residence may be tax-free, up to an allowable limit. However, the gain exclusion is not available on the sale of a second home. The primary residence is usually the home in which you live the most. For both homes, annual tax deductions include mortgage interest and property taxes. Loan origination points and mortgage insurance may also be deductible on both properties.
Contact a company like Barefoot Real Estate for more information and assistance.