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How a Vacation Home Can Make You Money

Written By:
May 10, 2010 at 9:43 PM

How a Vacation Home Can Make You Money

While the era of overindulgence and decadence may be over, don’t discount the sound value of owning one "luxury" item--the vacation home. Perhaps even saying the words, "vacation home" sounds extravagant, but if you have that special destination in mind, purchasing a second home makes financial sense.

A second home qualifies you for a bevy of tax benefits depending upon how you use and pay for the vacation home. Note, that these tax benefits only apply to those with two homes and not if you are so fortunate to be able to afford three or more.

The Overall Allure of a Vacation Home

Aside from being able to call your favorite destination "home," owning a second home provides you with some major mortgage interest deductions. Owning a second home allows you to write off all mortgage interest to purchase or improve two homes--up to $1.1 million in loans to be exact.

Deductions apply to first and second mortgages, refinances and home equities, as long as the loan is tied to one of your properties and you’ve used the money for repair, renovations or purchase.

Be aware that in order to qualify, $100,000 in loans must go toward home improvements, whereas up to $1 million may be dedicated toward purchase. Also, deductions apply for up to $1.1 million for the two homes combined.

Is It Worth Renting Your Vacation Home?

Inviting strangers or even friends and family members to rent your vacation home may sound unpleasant until you consider the breaks. Consider renting your home for a few weeks. You can rent your home up to 14 days a year free and clear--you don’t even have to claim the income on your tax return.

If you are warm to the idea of renting your home, you can deduct expenses such as repair, utilities and even insurance on your tax returns, however you will need to declare the rental income on your returns. Remember, your expense deductions are relative to the amount of rental income.

What if you don’t want to rent it out but can’t use it more than a few weeks out of the year? At that point, your vacation home is considered an investment property. This means that although you can deduct the full prorated amount, declaring your vacation home as an investment property will negate being able to earn the $1.1 million mortgage interest deduction.

Spending Your Golden Years on "Vacation"

Being able to retire in the place you’ve considered your home away from home is a dream to many. In the past people used to sell their primary residence and then ride off into the sunset living in their vacation home.

Today, many retirees enacting this strategy are having a bucket of ice cold water thrown on their plan. The law changed in 2008 where you can now only claim capitol gains exemption for the number of years you used this home as your primary residence, even if you’ve owned it for years.

Boat, Condo, Swiss’s Still a Vacation Home

Remember, although many people think of a vacation home as a homey cottage nestled by the beach or deep in the mountains, a second home does not have to fit into the traditional image. Your second home can be a condo, RV or even a boat. The formal description of a second home means that you must be able to accommodate sleeping, cooking and bathrooms. If you have these features, you’ve got your vacation home.

Barnhart, Cora. "Tax Tip on the Tax Advantages of Owning a Vacation Home." Bankrate. 27 February 2008.





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