Vacation Home Tax Benefits
One of the many benefits enjoyed by well-to-do individuals is an ability to own multiple residences. Often, the second residence is located in a resort location where significant rental income may be possible. Generally, the owner of the second residence is able to deduct the mortgage interest and the real estate taxes regardless of whether the property is rented. However, the interest deduction may be limited because the mortgage balance on both properties exceeds the applicable limit and the real estate taxes may be limited by the Tax Cuts and Jobs Act of 2017.
There is a very complex set of tax rules that govern the treatment of second residences that have both personal and rental use. There are rules regarding the number of allowable days of personal use. With respect to the rental portion of the property, there are very strict ordering rules and limitations on the rental deductions. With proper structuring, the $1,000,000 personal mortgage interest limitation and the AMT issues can be avoided, potentially allowing the owner to improve the economics of owning a second residence.
At ORBA, we have frequently advised clients on the benefits and risks of owning second residences. We have helped structure leases, assisted in monitoring the balance between rental and personal days, aided with financing, and made connections with leasing and sales professionals, all with a view toward maximizing the tax benefits associated with second-home ownership and thereby improving the overall performance of the properties.