Second Homes Tax Filing. Owners of second homes receive tax write-offs that can offset the expense of owning the home, and additional write-offs may apply for those who rent out their second homes part-time. However, correctly reporting the information from a second home on your tax return can sometimes make the difference in your ability to buy or refinance another home. Mark Wells of Preferred Financial Services addresses some common questions about second homes, rental income, and tax reporting.
From a future mortgage perspective, what do I need to keep in mind when I report income and deductions for my second home?
Lenders look at second homes differently than tax advisors, and this can lead to problems.To ensure that your second home remains classified as a second home to a lender, you must retain personal use of it for at least 14 days of the tax year, and check the box on Schedule E confirming that. Otherwise, the mortgage lender will classify it as investment property, and a different set of lending guidelines will be used when you apply for a mortgage.
Do I have to report rental income on the home?
If you rent the house out for less than two weeks (14 days) of the year, you do not have to report the rental income on a second home. (Ref. TurboTax https://turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Buying-a-Second-Home/INF12015.html.). If you rent it out for more than 14 days, all rental income must be reported on your Schedule E.
Do lenders count the rental income as part of my qualifying income?
Within certain restrictions, the lender will credit you with your net income (the income after you deduct the other home-related expenses), as long as you show a two-year history. But the flip side is that they will ‘charge’ you with the mortgage payment, including taxes and insurance, and include these expenses in your debt-to-income ratios.
How do the deductions for a second home differ from those for a primary residence?
The deductions allowed are much more complicated, depend on a number of factors, and are governed by how you used the home during the tax year.
What differences should I be aware of?
If the home was held for personal use during the year, and you rented it out for fewer than 14 days, then you can deduct all of the interest on the home under the same rules as a primary residence, including interest accrued on up to $1.1 million in mortgage debt. If you rented it out for more than 14 days, but used it for personal use, you must prorate the mortgage interest deduction according to the percentage of personal usage. If you used the house 36 days out of the year (10 percent of the time) and rented it the other 324 days (90 percent of the time), then you can deduct 90 percent of the mortgage interest paid, with limitations.
What are those limitations?
A tax advisor would be better able to address those. However, I also highly recommend that you allow your mortgage broker to review your tax returns BEFORE you file them, especially if you expect to apply for a mortgage in the next 24 months. That way, you can balance the tax advantages your tax advisor shows you, with income and expense reporting that does not leave you in the lurch when you are ready to borrow.
Mark welcomes questions and comments, and is happy to review your tax returns from a lender’s perspective, to verify that you are leaving your future lending options open. He can be reached at 864-235-9596 or Mark@TheGreatestRates.com.
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