Author: Tax Attorney - Steve Moskowitz | Date: 13 July 2018
SAN FRANCISCO, California – (July 11th 2018): If you are one of the 9.26 million Americans who own - or are considering the purchase of - a vacation home, you may benefit from the advice from tax attorney’s who can guide you through the many recent tax code changes that will soon affect your investment. It’s been over six months since the new Tax Cuts and Jobs Act was signed into law, bringing with it sweeping changes that reach nearly every taxpayer. For those paying a mortgage on two or more homes, the updated tax code may increase or decrease the real cost of ownership, so it’s important to understand what those changes look like and how you might be able to offset them.
Here, Steve Moskowitz - lead tax attorney of the tax law firm Moskowitz LLP in San Francisco - shares some things you need to know if you own (or hope to own) a vacation home:
1. Operating under a business structure can provide additional savings.
Using a business tax structure - such as an LLC or S-Corporation - to mortgage your vacation home may allow you to deduct the full amount of property taxes and write off your total mortgage interest as a business expense plus deducting your other expenses, including the new and improved greater depreciation under the new tax law. Just keep in mind that if the property appreciates during ownership you will attain more wealth and may be able to reap the additional benefits that Congress bestows upon owners of real estate.
2. You can use (and make updates to) a rental property and benefit on your taxes.
Section 179 of the tax code allows you to deduct for expenses like appliances and furniture used to furnish a rental property, as well as HOA fees, maintenance and repairs, and utilities. Plus, if you prefer to use your rental home more regularly, you can keep a record of usage so that your allowable deductions and write-offs can be calculated according to the days it was occupied by tenants. There are many types of special tax privileges that are given to real estate owners. For example, if you rent the property for less than 14 days that gross rental is yours without any income tax. And any days that you stay there for the primary purpose of maintaining the property, such as repairs, doesn’t count as personal use day. Also, if you want to trade up you can do so with a tax-deferred section 1031 exchange, so you don’t have to pay any tax now and even if you sell the property you pay less tax with the lower capital gains rate.
3. Financing your vacation home
Be like the wealthy and investors and use “OPM” other people’s money to make money. As long as you are earning more this way rather than using your own money you benefit as well as enjoying a tax deduction for the qualifying interest expense deduction. This concept of benefiting from using “OPM” is known as “leverage” and allows you to profit from a potentially unlimited number of investment properties, rather than restricting you to invest with your capital only.
4. Increase your mortgage interest deduction.
In 2015, the Ninth Circuit reversed the US Tax Court and provides that when unmarried taxpayers co-own a qualifying residence, they are each entitled to deduct interest on up to $1.1 million of mortgage debt. Prior to Voss, the IRS claimed that the maximum interest deduction was limited to $750,000 under the new law. The Voss decision allows for an interest deduction PER PERSON rather than per house, for non-business real property on mortgage principal up to $750,000 for an unlimited number of taxpayers, as long as the taxpayers are not married to each other; both spouses count as one person for the $750,000 limitation whether they file married filing jointly or separately. For example, if a group of friends purchased the home together they EACH would have a tax deduction for the interest on mortgage principal of $750,000.
5. Right now, the market for rental properties is white hot.
At this point, in many high-density areas of the country (like the Bay Area), supply of rental or short-term vacation properties, like Airbnb, cannot keep up with demand. There are plenty of reputable property managers looking for clients with homes to rent, making this a great time to consider adding your home to the inventory. In light of the recent tax code changes, whether converting your dream vacation home into a rental may present a solid strategy to earn tax-advantaged money when you are not using the home yourself or you are a seasoned real estates investor you should understand all of your new benefits. Please see our article in Forbes for more information.
However, it’s best to speak with an experienced tax attorney who can guide you through your specific situation, as there are many aspects that can affect the feasibility and benefits of your rental property. Book a consultation now with a tax attorney at Moskowitz LLP at www.MoskowitzLLP.com, or call their office toll-free at 1-888-829-3325. Visit www.MoskowitzLLP.com to learn more about their full suite of legal services.