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By: Renee Morad
There are tons of benefits that come with owning a second home: novelty and adventure, a place to escape and unwind, an opportunity to create memories that last a lifetime, a valuable tool to make vacation-craving friends like you a whole lot (for better or for worse).
But there’s another benefit that’s often overlooked: the tax breaks.
You already know that owning a home usually offers some tax deductions. But what if you own two? Or three? What if you’re a regular Donald Trump (back in his real estate, meat magnate heyday, of course)?
Since we know you won’t mind a little extra cash to spend while soaking in your surroundings during your next getaway, we thought we’d tell you how to reap the fruits of your second-home purchase.
When it comes to owning a second home, the interest on your mortgage is deductible. The same rules that come with writing off mortgage interest for your first home apply to your second.
In fact, you can write off as much as 100% of the interest you pay on up to $1 million of debt, which includes total debt taken on to pay for both homes, as well as money spent on improving the properties. (That’s not up to $1 million for each property—just up to $1 million in total.)
Is your second home a fixer-upper? If you want to spend the off-season making improvements to your hideaway, you can deduct the interest on a home equity loan or line of credit.
But there are a couple of exceptions.
For starters, there will be a limit on the amount you can deduct if the home equity loan on your main or second home is more than $50,000 if filing single or $100,000 if married or filing jointly.
Second, the amount you can deduct has a limit if the mortgage is more than the fair market value of the home, says Gil Charney, director of The Tax Institute at H&R Block.
For example, let’s say a taxpayer has a mortgage of $220,000 and takes out a home equity loan of $65,000. The property’s fair market value is $275,000. Since the difference between the fair market value and the mortgage is $55,000, then $55,000 of the home equity loan can be deducted, not the full $65,000.
You can also deduct your second home’s property taxes, which are based on the assessed value of the home. That’s good news. Even better news? Unlike the mortgage interest tax deduction, there’s no dollar limit on the amount of real estate taxes that can be deducted on any number of homes owned by the taxpayer.
But beware: Taxpayers who can afford two homes are likely to land in a higher tax bracket—which means slimmer pickings for tax savings. For example, in 2016, a married couple whose gross income exceeds $311,300 would have limits on the types of itemized deductions they could take.
If you rent out your second home for 14 days or less over the course of a year, that rental income is tax-free—and there’s no limit to what you can charge per day or week. Score!
But if you’re hoping to put your secondary digs on Airbnb or another rental site for more than 14 days during the year, be prepared to do some heavy math come tax time.
5 Tax Benefits of Owning a Second Home – Real Estate News and Advice – realtor.com
You’ll want to figure out the number of days you rent your home and divide that by the total number of days your home was used—whether it was you or a renter staying there. (The total number of days that the home was vacant doesn’t fall into this equation.)
For instance, let’s say you rented out your vacation home for 30 days within a year, and vacationed in your home for 90 days.
We’ll divide 30 (the days you rented it out) by 120 (the total number of days the home was used). The result: 25% of your rental-related expenses—which could range from utilities to the cost of a property manager—can be deducted. Now, if your home is losing value, that same percentage (in this example, 25%) of depreciation costs can also be deducted.
Here’s the caveat, Charney explains: Depreciation costs can be deducted only if there is rental income remaining after taking into account other deductions, such as mortgage interest, property taxes, and direct expenses tied to renting your home—like agent fees or advertising.
Maybe you bought a far-off hideaway that you’re lucky to visit a couple of times a year. Or perhaps your vacation home is just a quick drive away, and you spend every possible moment there.
If it’s the latter—and you don’t already know which of your homes is your primary residence and which is the second home—now’s the time to figure it out. Distinguishing between the two can have big tax implications when it comes time to sell.
That’s because a capital gain of up to $250,000 (or $500,000 for taxpayers who are married/joint filers) on the sale of the principal residence may be excluded from taxable income.
Your principal—or primary—residence is the home you used most during the five years prior to the sale. But other factors—such as your job’s location, voter registration address, and banking location—could also come into play. Among other requirements, you must own and use that principal residence for at least two of the five years before the home is sold.
We know—that’s a lot of heavy stuff to take in. But you knew your second home would pay off in more ways than one, right? Now, hurry up and file your tax return—so you can escape to your happy place and forget about burdensome things. Like taxes.
So what does a home inspector look for, anyway?
And their discoveries can help home buyers big-time: Provided you have a home inspection contingency in your offer, you can renegotiate with the seller to fix certain problems or to lower the price. Or, if the problem is more than you want to handle (think faulty foundation or roof on the verge of caving in), you can walk away from the deal with your deposit in hand. Either way, it’s a win-win for the buyer.
In short: a whole lot. “We’ve got 1,600 different items on our list that home inspectors are supposed to look at,” says Claude McGavic, executive director of the National Association of Home Inspectors, which trains and certifies home inspectors throughout the country.
And their discoveries can help home buyers big-time: Provided you have a home inspection contingency in your offer, you can renegotiate with the seller to fix certain problems or to lower the price. Or, if the problem is more than you want to handle (think faulty foundation or roof on the verge of caving in), you can walk away from the deal with your deposit in hand. Either way, it’s a win-win for the buyer.
Inspectors run down a checklist of potential problems. While we won’t list all 1,600, here’s the boiled-down version:
Bring any and all concerns about the property to your inspector before he begins, so he’ll keep a sharp lookout for possible problems. If the seller has disclosed damage, give your inspector a heads up about that, too.
Another smart move is to accompany the inspector during his rounds. It’s in your best interest to understand the home, its systems, and potential problems. For instance, an inspector can introduce you to electrical panels and shut-off water valves (which the seller may not know how to operate or forget to show you), and if he spots a problem, he can show you exactly how a system is malfunctioning and what it means. And this info will serve you well not only before you buy, but afterward as well.
By Credit.com
Is There Really Any Difference Between Mortgage Lenders? – Real Estate News and Advice – realtor.com
The Consumer Financial Protection Bureau has safeguards in place to make sure mortgage companies operate on a level playing field with consumers. The level playing field specifically has to do with rates, pricing, and whether borrowers are getting a fair and reasonable offer from one lender to another. But how banks look at your financial picture is something else entirely.
Here are some factors that impact how your mortgage company works and the deal you get on your mortgage.
The relationship your mortgage company has with Fannie Mae and Freddie Mac carries significance in whether or not they can fund your loan even if it is slightly outside the box.
For example, if you’re dealing with a company that originates the loan through another source, and then ultimately that loan is sold on the secondary market, the mortgage originator may be more conservative in its product offering and underwriting. Simply put, the more hands touching the file, the more scrutiny that file is going to have when the loan ultimately is delivered to the end investor.
Some mortgage companies still have what are called investor overlays, which are additional constraints an individual mortgage company may have beyond what Fannie Mae and Freddie Mac deem acceptable as traditional underwriting standards. For example, some mortgage companies will not let you pay off debt to qualify while others do.
Not all lenders carry the same types of loans, and some have differing restrictions for some loan types. For example, the debt-to-income ratio can differ among lenders. If you have a DTI on a jumbo mortgage (a special kind of mortgage based on the amount of the loan) beyond 43%, some companies won’t work with you, while others will go as high as 49%. Another example could be an FHA loan with a credit score, say, at 600 versus one at 640. Some work with a 600 score, some do not. (You can check your credit scores for free on Credit.com to see where you stand.)
Is There Really Any Difference Between Mortgage Lenders? – Real Estate News and Advice – realtor.com
Where you get your mortgage is entirely up to you as a smart, well-informed consumer. Do not be fooled by a lender or mortgage company promising you the world just to get your business, only to find later on your loan has too many roadblocks or your financial picture does not meet the guidelines set forth by that company. Integrity in lending and helping consumers is quality you should look for when picking a reputable mortgage source.
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