Buying a home is one of the largest financial decisions you are likely to make in your lifetime. Not only does home ownership affect personal wealth, it alters your tax burden. Home ownership makes you subject to property taxes and other tax issues, which are complicated when you own a second home. It is important to understand the tax implications of owning two homes before purchasing a second home.
Property taxes must be paid on every property you own. The more homes or other types of real estate you own, the more property tax you must pay. Property taxes are determined, in part, by the value of the home you buy. The local property tax authority will assess your home's value and use that value to calculate property tax. According to TurboTax, property taxes paid on each home you own are tax deductible. A tax deduction allows you to reduce the size of the income pool that is subject to income tax.
Mortgage Interest Deduction
Most homeowners take out mortgages to purchase homes, because they do not have enough money to pay for a home in full. The interest you pay toward a mortgage on your first and second home are tax deductible. Mortgage interest paid on homes beyond two is not tax deductible. If you own more than two homes, you can only deduct mortgage interest paid toward two homes. According to the IRS, "a home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities."
Renting a Second Home
If you rent out your second home at some time during the year, you must use the home yourself for a certain period of time during the year for the home to be eligible for the mortgage interest deduction. The IRS states, "you must use the home more than 14 days or more than 10 per cent of the number of days during the year that the home is rented at a fair rental, whichever is longer."
Selling a Second Home
When you sell your primary residence you are granted a £162,500 exclusion from the capital gains tax ($500,000 for married couples.). This exclusion does not normally apply to a second home, so profit from the sale of a second home is subject to the normal capital gains tax rate. If you have lived in the second home for a significant period of time, however, you may be able to use the exclusion. According to H&R Block, "if the second home was your main home for at least 2 years during the 5-year period ending on the date of sale, you can exclude up to £162,500 of the gain."