Want a Vacation Home? Three Ways the Math Can Work
You might not see much in the way of tax breaks on a vacation home, but these three tax considerations could make a difference.
The weather is warming up. Your retired friends are coming back from Florida. Not only did they avoid the cold, but they also got a tax break. Right? In the context of this article, it’s important to differentiate between state income taxes and the tax considerations of owning a vacation property. This article is all about the latter. A future column will address the former.
Before we get into the meat of it, I’ll break the bad news: It is almost never a good financial move to buy a second home. With the advent of Vrbo, Airbnb and similar services, it’s almost always cheaper to rent than it is to buy. Remember, for purposes of this article, we are not factoring in state income taxes that could be saved if you buy a second home and meet residency requirements in a tax-friendly state. That said, below are three ways you can make the math more favorable.
1. Rent out your vacation home for two weeks or less.
By definition, a vacation home is not a rental or investment property. Rentals are reported on Schedule E and have completely different rules than a vacation home. However, the IRS allows you to rent your home for 14 days or less without having to report that income. This can be especially impactful for homes in popular tourist destinations and has been coined the “Masters exemption” because of how much tax-free income is earned by those with homes in Augusta, Ga., during Masters week. Think beach towns during Memorial Day and Labor Day. Think college campuses during homecoming and graduation weekend.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
2. Take advantage of the mortgage interest deduction.
Yes, you can deduct mortgage interest on a second home. However, there are a few things to be aware of. This benefits you only if you itemize deductions. On your form 1040, Schedule A reports itemized deductions. You add up all your deductions, and if that number is higher than the standard deduction, you itemize. The standard deduction was doubled as part of the Tax Cuts and Jobs Act (TCJA), and many of the deductions were capped. According to the Tax Foundation, only about one in 10 taxpayers itemizes. To see a benefit from your vacation property, you must be in that 10%.
The TCJA also reduced the amount of mortgage debt that you can use in this calculation. You cannot write off interest on aggregate balances of more than $750,000. Therefore, if you already have a $500,000 mortgage, only $250,000 of debt on a second mortgage property will give you a tax break.
3. Take advantage of the property tax deduction.
Property tax deductions can also be found on Schedule A. This is very similar to the rule above because you must itemize deductions to see any benefit. Also similar is that there is a cap on the deduction because of the TCJA. This is the dreaded “SALT cap.” You are allowed to deduct a maximum of $10,000 in state income taxes and property taxes paid. Most of our clients hit that cap without a second home. In lower-cost areas, you may see a marginal tax savings by writing off a bigger property tax bill.
As I often preach, use your financial plan as a guide to ensure that you can afford a second home. If you want to double-check your plan, you can use this free software.
Once you’ve received the green light from the plan, consider the qualitative factors. What does upkeep look like? How much time will you be able to spend there? You don’t ever want trips to your vacation home to feel like an obligation. If you decide to go for it, give me a shout — I’d love to visit!
Related Content
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.
-
Did Fidelity Just Kill Commission-Free Trading?
Fidelity Investments recently announced plans to introduce a $100 "surcharge" on certain ETF trades. Here's what to know.
By Charles Lewis Sizemore Published
-
12 Free Things to Do on Vacation
Looking for fun, free things to do on vacation? From walking tours to festivals to museums, there are all kinds of options for the budget-conscious traveler.
By Daniel Bortz Published
-
Five Next-Level Questions to Ask a Prospective Financial Planner
These questions go beyond the basics and may actually help you decide whether a particular financial planner is right for you.
By Evan T. Beach, CFP®, AWMA® Published
-
Five Tips for Choosing Your Insurance Agent or Broker
Selecting an insurance professional could be as important as picking a surgeon. It might not be literal life-or-death, but it could be financial life-or-death.
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Sports Memorabilia Appear to Have Arrived as Investing Class
The world's most prestigious auction house recently had a Sports Week in which it auctioned off sports collectibles.
By Thomas Ruggie, ChFC®, CFP® Published
-
Sending Your Child to College? Three Financial Preparations
With big changes ahead, parents should ensure that they can help their kids and access important information if necessary.
By Kelley Wolfington, CTFA Published
-
You Can Now Invest in Hot Private Tech Companies: Should You?
The launch of a fund composed of 23 of the hottest private tech companies hit the ground running with investors, but a wait-and-see approach might be prudent.
By Thomas Ruggie, ChFC®, CFP® Published
-
Estate Planning in Six Manageable Steps
Getting started on your estate plan can be daunting. Breaking the process down into these six smaller tasks can help you avoid getting overwhelmed.
By Patrick M. Simasko, J.D. Published
-
Six Strategies for Retiring on a Fixed Income
When your paychecks quit rolling in, will you be OK? Run through this pre-retirement checklist to see how ready you really are for life on a fixed income.
By Kevin Brauer, MBA, CPA, CMA Published
-
Own a Business? Beware of False Friends
These words don’t mean what you might think they mean in another language. Some brands have learned that lesson the hard way.
By H. Dennis Beaver, Esq. Published