Do you have two homes? If you do, you may use one as your primary address for items such as tax reporting and voter’s registration—and the second as merely a vacation home. However, treating your vacation property as your main home can be done for a number of both financial and non-financial reasons. So what should you do? Giving thought to the long-term effects of this decision often helps you determine the best solution.
Here are four reasons why you may want to consider your second home a primary residence.
1. You Live There Most of the Time
If you find yourself spending a greater percentage of time at your second home, you may want to consider your second home your primary home. That said, if you choose to claim your vacation home as a primary home for tax purposes, you’ll need tangible proof of residency. Typically, your main home will be listed as the address on your driver’s license. It’ll also be where you receive most of your mail. In Publication 523, the IRS also suggests having your main home be near your bank, your work, etc.
2. You Want to Live There Full Time in the Future
If you plan to retire and live in your second home year-round, you may want to make it your primary residence. Keep this idea in mind when spending home improvement dollars. You may wish to invest in your second home instead of fixing up your current home. If both your primary residence and your vacation home could benefit from kitchen upgrades, why not spend the money on the home you plan to live in after retirement?
3. Differences in State Taxes
Differences in state income and property taxes may make it more beneficial to make your vacation home your primary residence. Most states charge residents a combination of sales tax, income tax, and property taxes. Depending on your income and the value of your home, a change in primary residence may be worth considering. However, you’ll need to establish residence in the new state, which can be a complex process.
4. You Plan to Sell the Home
If you plan to sell your second home, you may want to research the taxable exclusion of $250,000 ($500,000 if married filing jointly) in gains from sales of primary residences. To qualify for this exclusion, you would need to treat your vacation home as a primary residence for at least two of the last five years prior to selling. However, if you did not treat your second home as a primary residence for any time after 2008, the gain will be reduced based on a pro rata amount. Your tax advisor can help you determine if you qualify for this exclusion.
If you believe that treating your vacation home as a primary residence would be a beneficial decision for you, consult an attorney or tax advisor. These professionals can assist you with the proper tax reporting. They’ll also make sure you are properly qualified as a resident in the state where your second home is located.
[skyword_tracking]
FAQs
Yes, a second home can become a primary residence. For eligibility, you have to meet the IRS qualifications for a primary residence, which is that the home was used as your primary residence for 24 months out of the previous 5 years. There are a few reasons you might want to do this.
How do lenders know if its your primary residence? ›
The Rules Of Primary Residence
Where you spend the most time. Your legal address listed for tax returns, with the USPS, on your driver's license and on your voter registration card. The home that is near where you work or bank, recreational clubs where you're a member or other family members' homes.
Can you live in your vacation home? ›
You Live There Most of the Time
If you find yourself spending a greater percentage of time at your second home, you may want to consider your second home your primary home. That said, if you choose to claim your vacation home as a primary home for tax purposes, you'll need tangible proof of residency.
Is it harder to get a mortgage for a vacation home? ›
Qualifying for a vacation home loan is typically harder than it is for a primary property, with stricter debt-to-income ratio, credit score and down payment requirements. A local lender can help you navigate local regulations and find the best vacation home insurance for your property.
What qualifies as a primary residence? ›
A primary residence is one that you occupy for the majority of the year and use as your permanent address on documents like your driver's license and tax returns. A primary mortgage loan is used to finance a primary residence. A second home is a property that you own but do not occupy most of the year.
How does IRS consider primary residence? ›
If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circ*mstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well.
What is the 6 month rule for main residence? ›
The six-month rule – this is when the ATO allows you to hold two PPOR if a new home is acquired before a purchaser disposes of the old one. Both properties will be treated as PPOR for up to six months in this case.
Can my wife and I have separate primary residences? ›
Bottom Line. The IRS prohibits married couples from claiming two primary residences for tax purposes. The designation of a primary residence, or “main home,” holds significant importance for homeowners due to the array of tax benefits tied to this status.
How many days must I live in a second home? ›
“Broadly speaking, if you personally live in your second home for 14 days or fewer — or less than 10 percent of the days it is rented — during a year, then it would be considered a rental property and the income earned would be taxable,” he explains.
What is the disadvantage of vacation home? ›
Higher Down Payment
A second home that won't be lived in full-time will require a down payment of around 30–30%, and your credit score will need to be higher, since you'll be taking on more debt.
A second home is a dwelling you own in addition to your primary residence. A vacation home is a type of second home that owners use for leisure throughout the year but do not reside there permanently.
What is the IRS rule for second homes? ›
For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.
What is the rule of thumb for buying a vacation home? ›
Hehman says a good rule of thumb is to set aside about 2 percent of the home's value each year for maintenance. For professionally managed rental properties, he says, buyers should expect the management company to pocket anywhere from 20 to 50 percent of the rental income.
Do you need 20 percent down to buy a second house? ›
But it takes a 10% down to buy a vacation home — and that's if the rest of your application is very strong (high credit score, low debts, and so on). If you have a lower credit score or higher debt-to-income ratio, your mortgage lender may require at least 20% down for a second home.
How much should I put down on a vacation home? ›
How Much Money Should You Put Down on a Vacation Home? As a rule, a buyer of a vacation home needs to come up with a down payment representing at least 10% of the purchase price. So, if the purchase price is $400,000, a 10% down payment would be $40,000.
Can a vacation home be a tax write-off? ›
If you don't rent out the home, you may claim the home as a qualified second home and take the deduction. If you do rent out your vacation home, you must use either the home more than 15 days a year or more than 10% of the number of days the home is rented in order to claim the deduction.
How do I avoid capital gains tax on a second home? ›
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
How to make sure a second home doesn't become a tax trap? ›
If you have two homes, the state of domicile should be the one in which you register to vote; where you have your driver's license, your car registration and your primary doctors; and where you have your federal tax return and financial statements mailed.
How much can you write off on a second home? ›
Are Second-Home Expenses Tax Deductible? Yes, but it depends on how you use the home. If the home counts as a personal residence, you can generally deduct your mortgage interest on loans up to $750,000, as well as up to $10,000 in state and local taxes (SALT).
