If you have spent any time reading this blog, you know I have made it abundantly clear that the Long Beach Peninsula is the real estate value of the whole Northwest Coast Line from Brookings, OR to Port Angeles, WA.
So let's say you buy a vacation home at the beach. How does this set with your tax man. First before I write another word on taxes : DISCLAIMER ALERT! I am not a tax professional and am not advising anyone on specific tax matters. Before making any decisions about taxation and its implications on your personal finances, be sure to consult your tax professional.
OK so the IRS has some weird rules regard vacation or second homes and rental properties. Many people figure they will rent out their beach house to others when they are not using it to help pay the costs of ownership. This is fine but depending on how often you rent it, it could change the tax status of the property.
The IRS deals with second homes differently than it does rental properties. If someone buys a second home and they use it exclusively for their own purpose, ie. they do not rent it out, then the IRS allows under current tax law the owner to deduct the mortgage interest up to the limits, currently at a maximum mortgage amount of $1,000,000.
Interestingly according to tax pros, the IRS doesn't care if you rent the second home out so long as it is not more than 14 days in a calendar year. Even if you rented it out for a high weekly rate, so long as it never exceeds 14 days in a calendar year, you are not required to report it. The home remains a second home.
If the house is rented more than 14 days per year it is no longer a second home and is treated differently under IRS rules. It becomes a rental property and it may actually be better in the end but it will become more complicated as the expenses and depreciated are now taken into consideration, checked against the rental income earned, now required to be reported and appropriate taxes paid.
If the rental home loses money, ie expenses are greater than income, this can provide a shelter from taxation for the owner's annual tax bill. However, when the home is sold in the future there will likely be a large capital gain that could hit the home owner hard.
The IRS tax code is a complicated animal and this is why a good CPA that specializes in individual income tax service is indispensable. The whole point of this article is that great deals at the coast aside, owning a beach house either as an investment or second home can be even more affordable that just the price and mortgage payment would indicate. Talk to your banker and your tax pro and see just how affordable that beach house can be. The talk to your local real estate pro and see what's out there.