I just read this very informative story in Kiplinger regarding the tax ramifications for owning a second home and wanted to share with you what I learned. If you are among the many homeowners looking to purchase a second home this year in Napa Valley, Sonoma or Healdsburg, you might be interested to know a few of the benefits. Under our current tax laws, people who own second homes can take advantage of several tax breaks. Just keep in mind, different tax rules apply depending on your reasons for owning a second home, be it your primary residence, for family vacations, to use as a rental, or any other investment purpose.
1) Personal Use
The IRS allows homeowners to deduct 100% of the interest paid on up to $1.1 million of debt, which can include the debt on a second home, as well as the property taxes in the same way you would for your primary residence. You cannot, however, write off any of the costs related to utilities, upkeep, and, even in many cases, insurance. Make sure you check out the rules that apply when the second property is considered a personal residence, even if family members are using it.
2) Rental Use
Did you know that when you rent out your second home for 14 days or less per year, you don’t have to report that income to the IRS? This can include rental for photo shoots that can be quite lucrative. However, the property is officially considered a rental when you rent it out for 15 days or more over a one-year period. You must report all that rental income to the IRS. Of course, expenses, from mortgage interest and property taxes, to property manager fees and utilities can be deducted. Plus, up to $25,000 can be deducted per year for any losses in your rental property, which includes maintaining the property, as fix-up days don’t count as personal use.
3) The Sale of a Second Home
You may report a capital gain of up to $500,000 ($250,000 if you are unmarried), and have it be tax-free when you decide to sell your primary residence. However, expect to pay capital gains tax when selling your second residence if it is not considered your primary residence, unless you make it your primary residence before you sell. Until a few years ago, you needed to make your second home your primary home for two of the last fives years of ownership. However the rules have changed. Read the article for clarification on how to take advantage of tax benefits when you make your secondary home your primary home. You will need to have all the relevant documentation to prove that your second home was our primary residence.
There are many tax advantages associated with wine country ownership, including 1031 Exchanges, if any part of the property is an investment and produces income. There are also additional agricultural tax benefits for some wine country properties.
If you are considering selling or buying a second luxury home, estate, vineyard or winery in Napa Valley or any of the surrounding communities this year, please call me at 707-738-4820 or email me at [email protected]. I am happy to share with you some of the many tax advantages my clients enjoy so you can confirm the benefits with your CPA when it comes to buying or selling a second home. Meantime, don’t forget to LIKE me on Facebook!