Residential Investment Property

Tax benefits of a Second Home

Investment in a secondary home is a part of financial planning for most individuals because of the number of tax advantages associated to this investment. The capital appreciation that comes along by way of increase in property value is a bonus.

The tax department must categorize your secondary home as a vacation home to be eligible for tax concessions. This implies that the IRS should not categorize your secondary home as a rental property or an investment property. There are two necessary conditions that you need to comply with in order that your secondary home qualifies for a vacation home and the associated tax shelter for a vacation home. The first condition stipulates that your vacation home must be used for personal use for a period of at least 14 days in a calendar year. You may choose anything from a condo, duplex or a lake side cabin to be used as a vacation home. The second essential condition for your vacation house to be eligible for tax shelters is that it should consist of a sleeping place, bathroom and a kitchen.

Let us understand the tax benefits of a vacation home by means of a simple example. An individual invests in a lake side vacation home with USD 75000. He meets both the conditions so that his investment is classified as a vacation home and not as a rental property or an investment property. He ensures that the vacation home is used for a minimum period of 30 days in a year including the personal usage of 14 days.  Let us assume that you are able to rent out this lake side home for a period of 60 days at the rate of USD 150 per day. This would generate an income of $9000 per year for you. Thus you make 9000$ from an investment of 75000$ which is a healthy 12% after taxes. It is absolutely vital that the location of your vacation house is attractive enough to attract lot of occupants.  In this example we have considered only 60 days as the duration for which the vacation house is utilized by other people. Your post tax returns are likely to be higher in case the occupancy levels for vacation home are higher.

The above tax advantage is over and above the normal tax advantage that is available for your primary home as well. The interest amount payable by you to the lending institute on the home loan interest expenses paid to the lending institute are tax deductible from your overall earnings.

It is desirable to take professional assistance of a financial planner or an accountant prior to investing in a vacation home. As a tax savvy individual, it is important for you to understand the tax treatment differences between a rental property, investment property and a residential property.  Save taxes the legal way by utilizing the tax shelters provided by the government for investment in a secondary home. Let your money work as hard as you do.