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If you own a vacation home, you'll be glad to learn that there are a variety of tax breaks to offset your costs of ownership.
Getting away to a vacation home is a great way to relax and enjoy the beach, the mountains, or the wide open spaces, but there's another advantage: When you do your income taxes, you can deduct some of the costs associated with owning a vacation home. The costs that you can deduct include:
-Real estate tax
-Personal property tax
-Mortgage interest
-Points
Real Estate Tax
You can deduct the real estate taxes you pay on a vacation home. Include these on Schedule A, Itemized Deductions. There are no limitations on the amount of real estate tax or on the number of homes for which you can take a deduction for real estate taxes. But you can't take this deduction for a motor home or boat, because you don't pay real estate taxes on those. Instead, you pay license fees, which may include some personal property taxes.
Personal Property Tax
If your vacation home is a motor home or boat, you can't deduct real estate taxes, but you can deduct the personal property tax. The personal property tax is the ad valorum portion of the license fee, which is the portion of the fee based on the value of the property.
Mortgage Interest
The mortgage interest deduction has a few more rules than real estate taxes and the personal property tax.
Is the Vacation Home a Qualified Residence?
To take a mortgage interest deduction for a vacation home, the home must be a qualified residence, which means that it must have a permanent toilet and facilities for sleeping and cooking. This is usually not a problem for a cabin in the mountains, but for recreational vehicles and boats, this can be a tough test to pass.
Is This Your Only Second Home?
You can only take a mortgage interest deduction for your principal residence and one second home. If you have multiple vacation homes that qualify under the first rule above, you can choose which home to designate as your second home for tax purposes each year. Choose the vacation home with the largest total deductions for real estate tax and mortgage interest.
Is the Loan Secured by the Property? Are You Responsible?
The loan must be secured by the property, and your name must appear on the loan documents as the person responsible for repaying the loan.
How Much Interest Are You Paying?
You are generally limited to taking mortgage interest deductions on a total of $1,000,000 in acquisition indebtedness and $100,000 in home equity indebtedness each year.
Acquisition indebtedness is a loan secured by your primary residence or one second home that you can use to construct, acquire, or improve a home.
Home equity indebtedness is a loan secured by your primary residence or one second home that you can use for any purpose. This is a broader type of indebtedness than acquisition indebtedness, but it's limited to a maximum of $100,000 or the fair market value of each home reduced (but not to below zero) by the home acquisition indebtedness and any grandfathered debt (described next).
If the total of the mortgages on your primary residence and your vacation home is greater than allowed limits, your deduction will be limited. The exception to this rule is if all of your mortgages began before October 13, 1987 (which means that you have grandfathered debt), in which case all of the mortgage interest on your principal residence and one second home is deductible, regardless of the debt amount.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) rules for deducting mortgage interest are different from the rules for regular taxes.
The mortgage interest you pay on personal property (motor homes (only if used on a transient basis) or boats, for example) or for home equity indebtedness (taken out after June 30, 1982) does not qualify for AMT purposes.
For more information on mortgage interest, see IRS Publication 936: Home Mortgage Interest Deduction.
Points
You can deduct the points that you pay to acquire or refinance a vacation home, but you must deduct them over the life of the mortgage, rather than in the year you pay the points.
If the total mortgage debt on your primary residence and designated second residence is over $1,100,000, the deduction for points will be limited.
For more details on deducting points, see IRS Topic 504: Home Mortgage Points.
If You Rent Your Vacation Home
If you rent out your vacation home, then additional rules may apply. See the section on Personal Use of Vacation Home or Dwelling Unit, in IRS Publication 527: Residential Rental Property, Including Rental of Vacation Homes.
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