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Your Return, Taxes and Second Homes

Whether it’s to escape wintry weather, spend some time near children and grandchildren, or provide appropriate living space for a college student, many New Yorkers (and others) have turned to second homes, both for fun and investment. Depending upon the circumstances, there are some important implications for you to consider concerning taxes and second homes.  Here are a few pointers.

Taxes and Second Homes for Personal Use

If you truly use the real estate as a second home—i.e., you don’t rent it out for significant portions of the year—you can deduct mortgage interest on the second home just as you would on your primary residence. This rule applies whether the second home is located within the U.S. or abroad. Ordinarily, in such cases, you can also deduct property taxes on the second home. As to other expenses, such as utilities, maintenance and insurance, the normal residential rules apply. That is to say you generally may not write off such expenses.

The “Masters Exemption” for Renting the Second Home

Depending upon the location of your second home, you may be able to take advantage of the so-called “Masters Exemption.” Under IRS rules, a taxpayer may rent out his or her property (i.e., one’s first or second home) for 14 days or less each year and pay no taxes on the rental income. The special rule is called the “Masters Exemption,” because it originally applied primarily to homeowners in the Augusta, Georgia area, who rent out their homes during the Masters Golf Tournament for thousands of dollars. Your property needn’t be located near Augusta National Golf course, of course. If your property is located near a theme park or other attraction, you might consider the benefits of renting it out for 14 days or fewer each year.

Special Rules for Foreign Property Like-Kind Exchanges

Many taxpayers are familiar with the so-called 1031 exchange rules. Also known as the “Starker exchange” or “Like-Kind exchange,” this sort of transaction is one of the most powerful tax-deferment strategies available to U.S. taxpayers. In a word, a 1031 exchange allows a taxpayer to “defer” paying capital gains taxes on an investment property when it is sold, as long as the taxpayer purchases another “like-kind property” with the profit gained by the sale of the first property.

Real property in the United States and real property in a foreign country are not like-kind properties, however. Therefore, if a taxpayer sells a U.S. property and purchases a similar property in Bermuda, it would not qualify for a like-kind exchange deferment of the gain. If the new property was located in the U.S. Virgin Islands, like-kind exchange rules would apply, however. Note also that in most cases, a primary residence does not qualify for an exchange because it is not used in trade or business or investment. Finally, while a U.S. property may not be exchanged for a foreign property, a foreign property exchanged for another foreign property does qualify.

Other Rules Apply to Foreign Ownership

The rules concerning taxes and second homes don’t stop at the water’s edge.  Taxpayers need to be aware that to the extent one owns foreign real estate, one may be required to file a number of additional U.S. tax forms. For example, if you collect your rent via a foreign bank account, you will need to file an FBAR (Report of Foreign Bank and Financial Accounts) form if the aggregate value of all your accounts is $10,000 or more “on any given day of the calendar year.” Other forms may also apply to your situation.

Mackay, Caswell & Callahan, P.C.—Experienced Tax Attorneys

Are you considering or have you recently purchased a second home? Do you have that perfect Caribbean hideaway identified for your later years? Are you concerned about taxes and second homes? The tax rules and regulations concerning second homes, both within the U.S. and beyond, can be daunting. Get the peace of mind that comes through trusted advisors. Both Upstate New York tax attorneys and New York City tax attorneys at Mackay, Caswell & Callahan, P.C. are available to help you understand your options. We have more than 30 years of experience in assisting taxpayers with all sorts of tax-related issues, including second homes and other investment properties. We have offices in Albany, New York City, Rochester, Syracuse, Utica and Watertown. Don’t delay; we have a New York tax attorney ready to help you with your tax issues.