Tax Deductions for Vacation Homes

Naples has become a highly desirable destination in Florida and with good reason. Residents and vacationers enjoy more than 10 miles of beautiful sandy beaches along the Gulf of Mexico. Naples is also near the Everglades National Park and the Ten Thousand Islands National Wildlife Refuge. Golf enthusiasts are drawn to the area, which has nicknamed itself the “Golf Course Capital of the World.” The final tournament for the LPGA is played every year at the Tiburon Golf Club’s Gold Course. Browse the many art exhibitions along Gallery Row or head to the Waterside Shops for your next outdoor boutique adventure. If you are considering a new vacation home in Naples, you may have some questions about the real estate market or how to go about deducting vacation home expenses. Here is what you should know.

Real estate in Florida remains robust. According to Florida Realtors, the average median price of a single-family home has increased by 3.5% over the last year and 8.6% for condos. The Naples area remains a competitive market, as potential homebuyers are increasingly drawn to purchasing both primary and vacation homes in this area. The Naples market continues to trend toward favoring the sellers, as the home inventory remains lower than the current demand. Real estate markets can fluctuate, however, so be sure to enlist the services of a knowledgeable real estate agent. If it continues to trend toward a seller’s market, your agent will help you determine the competitiveness of your offer and whether you can expect any concessions from the seller.

Once you have decided to purchase a second home in Naples, you will need to determine whether it will be a vacation home or an investment property.

A vacation home is also commonly referred to as a recreation or second home. Vacation homes are typically located in a distinctly different city or state from the homeowner’s primary residence. Many vacation homeowners prefer their vacation property to be fairly accessible by plane or car, however, as they intend to spend at least part of every year there.

In order to qualify as a vacation home for tax purposes, it cannot be managed by a property management company when the owner is not in residence. If you are planning to pursue financing for your vacation home, lenders require the property to be suitable for living year-round, no matter how much time you expect to be there. You can also expect a higher interest rate and possibly a higher down payment with financing a second home too.

If you are purchasing a new vacation home this year, there are different means of deducting vacation home expenses. The Internal Revenue Service (IRS) states that mortgage interest for a vacation home can be deducted, provided the home meets the same requirements as the primary home.

Homeowners can deduct up to $750,000 between both the primary home and the vacation home if the property was bought after December 15, 2017. If the home was purchased before that date, then the eligible deductions total $1 million. Vacation homeowners may also be able to deduct property taxes too. This includes up to $10,000 in state and local property taxes. Check with your attorney or accountant regarding the specific tax laws applying to your property.

Investment homes are generally purchased with the goal of generating rental income. An investment home cannot be owner-occupied but must be specifically rented out to others. A property management company can be utilized to oversee the property, which may be something to consider if your primary residence is located a significant distance away. While homeowners cannot occupy the property year-round, they are allowed to inhabit it for part of the year. Typically this comes down to 14 days or less than 10% of the number of days per year rented, whichever is greater.

There are tax deductions available for homeowners interested in investment properties, too. All rental income of 14 days or more must be reported to the IRS as it is subject to taxes. Rental income includes advance rent, monthly rent payments, and security deposits. If you claim the rental income, however, you can also deduct many costs associated with managing and maintaining the investment property.

You may be able to deduct mortgage interest and property taxes, such as with a vacation property. You may also be able to deduct your costs of advertising, maintaining, and repairing the home. If you are paying for the utilities, you may be able to deduct those too. The cost of homeowners insurance is also a deductible expense. Again, check with your attorney or accountant for the specifics regarding your investment property purchase.

Whether you are interested in purchasing a new vacation or investment home, take the time to hire a knowledgeable real estate agent to help you. Look for an agent who is familiar with Naples, including its different neighborhoods and access to amenities. Your real estate agent should also demonstrate an understanding of the trends in the Napes real estate market too. You will benefit from their expertise in an area known for second and investment properties, as well as their recommendations for lenders in the area.

Understanding the differences between vacation homes and investment homes will help you determine the right choice for your new purchase moving forward. In addition, knowing the specifics of deducting vacation home expenses will increase your confidence with your purchase. When you are ready to hire an experienced real estate agent, contact Jill Nicholas. She is an expert in the Naples real estate market. Her knowledge, organization, and dedicated approach will help you find the vacation home of your dreams. Reach out to Jill to check out available properties in Naples today.