How to Deduct Expenses for Your Second Home on Your Tax Return

As a homeowner with a second home, it's important to understand how to properly report and deduct various expenses on your tax return. Whether your second home is being used by your daughter and her spouse, or is rented out, there are specific rules and regulations that you need to follow. This article will guide you through the process of claiming property taxes and other expenses as deductions on your federal tax return. However, always consult official IRS guidelines or a tax professional for the most accurate advice.

Property Taxes on Your Second Home

Under existing law, you can claim property taxes on your second home as an itemized deduction. However, this deduction is subject to limitations. You can only claim property taxes as part of your total itemized deductions, which include other deductible expenses such as mortgage interest and charitable donations. These itemized deductions must also be less than the applicable standard deduction for the year. If they are within the limit, you can save on taxes by itemizing.

Example: Itemizing vs. Standard Deduction

For the tax year 2023, let's consider the following example:

Property taxes for your first home: $4,000 Property taxes for your second home: $4,000 (your daughter and her spouse use it for 100% of the time) State income taxes: $5,000 Home mortgage interest: $6,000 Charitable donations: $500

In this example, your total property taxes amount to $8,000, and your total itemized deductions including state income taxes, home mortgage interest, and charitable donations sum up to $19,500. The standard deduction for Single filing status in 2023 is $13,850. Therefore, it would be more advantageous for you to itemize your deductions, as your total allowable deductions ($19,500) are higher than the standard deduction.

Of your allowable deductions, only $2,150 ($19,500 - $13,850) would result in a tax savings because the maximum amount of deductions that can be claimed is limited to $10,000 for property taxes and other itemized deductions combined.

Renting Out Your Second Home

If you were to rent out your second home for at least 15 days during the year, the expenses you mentioned (such as property taxes, home mortgage interest, and HOA fees) could be fully deductible as rental business expenses. You would not be limited to the $10,000 cap, and would also be eligible to claim depreciation on the structural part of the second home. However, it's important to note that you would need to report the rental income on your tax return.

Not a Business for Non-Revenue Purposes

It's crucial to distinguish between using your second home for personal use and for rental purposes. If you are not charging market rent, the second home is not considered a business, and therefore you cannot deduct the associated expenses as business deductions. This applies even if the property is jointly used by your daughter and her spouse.

IRS Publication 17 for Depreciation

If you do rent out your second home, you can claim depreciation on the structure of your second home. According to IRS Publication 17, the IRS provides guidelines for determining the depreciation of a second home.

Conclusion

In conclusion, understanding the rules for claiming deductions on your second home is crucial for maximizing your tax benefits. Whether you use the property for personal use, or rent it out for income, you need to follow the correct procedures. For detailed information and personalized advice, always consult the latest IRS guidelines or a tax professional.