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Tax Advantages of Buying a Second Home and How to Make Use of Them

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By : marco benavides    99 or more times read
The reasons for buying a second home are many...they can be used as vacations spots, rentals, second homes, businesses, investments or a combination of the aforementioned. Whatever its use, one of the reasons to purchase a second home is the tax advantages. While tax rules can seem like a know, they can be untied and understood.

A deduction for personal use of the second home can be taken when it is used for more than 14 days or 10 percent of the total days that it is used as a rental to other parties. Something to keep in mind here is that the rental to others must be at a fair rental price. If you do not rent out the home, and if it is used for personal enjoyment, then the entire expenses on the home can be taken as Schedule A itemized deductions.

These Schedule A itemized deductions include: Full amount of mortgage interest, for your first and second homes only, real estate taxes and theft and/or casualty losses.

One great thing about a second home is that you can rent it out for less than 14 days per year and not have to report the rental income. Not only that, you can also deduct the mortgage interest and real estate taxes. On the other hand, if you rent for more than 14 days, the income must be reported and you can deduct any expenses associated with renting on Schedule E. Some of the Supplemental Income and Loss categories on Schedule E include cleaning, maintenance, insurance, management fees, repairs, depreciation and utilities, among others.

Where it gets tricky is if you use the property as a rental and for personal enjoyment because expenses must be prorated according to when the home is rented and when it is being used personally. You have to be very meticulous about your record-keeping in case the IRS comes calling.

It can get even trickier when you are dealing with limits on deductions because the amount of rental expenses is limited to the amount of rental income. Say real estate taxes, mortgage interest, theft and casualty losses and rental activity expenses amount to a rental loss, you would no longer be able to deduct other expenses like depreciation, repairs, utilities and pest control, among others.

There are real tax breaks available if you really know how to take advantage of them. However, in order to be able to fully take advantage of the tax breaks, you must have intimate knowledge of the tax code. Unfortunately, most people have never even looked at the tax code and they only have a foggy notion of what it contains.

If you are like most people, you use a tax professional to handle your tax issues. Therefore, the best thing that you can do is pay a visit to the person who handles your tax matters. Ask the person you trust with your tax matters about purchasing a second home and the tax ramifications. Once you know what you will be able to do, you can decide whether the time is right for a second home.
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