A Tax Tip Article from The Tax Institute at H&R Block

Most often, people purchase a second home in a favorite vacation destination, such as a lovely Cape Cod in Maine or the mountain-view cabin in Colorado. In addition to providing you an exciting get-away, owning a second home offers some great tax and financial benefits as well.

$econd home, $econd income
A second home doesn’t have to serve only you and your family. In fact, an additional home can be used as rental property, which provides a source of income.

For example, if you find your dream home in Florida, but only visit during the winter months, consider renting it for short-term leases through spring and summer. A professional property management company can help locate a suitable tenant, collect rents, keep an eye on the property, and take the hassle out of long-distance rental management. Of course fees are involved, so you’ll have to decide if they’re worth it.  

Keep in mind, if you rent more than 14 days a year, and if your personal use doesn't exceed 14 days or 10 percent of the rental days -- whichever is greater -- then your interest, property taxes, and operating expenses are deductible as rental expenses.

A taxing proposition
Buying a second home may also offer additional deductions when tax time rolls around. Remember, however, a second home or rental property does not qualify you for the first-time homebuyer credit.

Mortgage interest and home equity loan interest on a second home are deductible up to certain limits. Real property taxes on your second home are deductible as well.

Not sure if your houseboat or RV qualifies as a "home." To qualify, the asset must have living facilities: kitchen, bathroom, bedroom, etc.

2009 changes
Starting in 2009, if you convert your vacation home to your main residence and then sell it, you may not be able to take the full $250,000 ($500,000 MFJ) exclusion from gain on the sale of a principal residence -- even if you live in the home for two or more years. If you’re thinking of turning your second home into your first home, be sure to discuss the tax consequences with your tax advisor.

This Tax Tip Article is brought to you by The Tax Institute at H&R Block.

To view other helpful tax tip information, visit the H&R Block Community, Digits, at  www.digits.hrblock.com

As always...everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Tip Article is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.