Buying a Second Home: Any Tax Implications?

Today's tax question comes from "DE" in Washington, DC. He asks, "Hi, I own a house in the city of Baltimore and I plan to buy a second home within about 18 months of the date I bought my first one. I don't intend on changing my primary residence, nor renting out the second home for the time being. I'm given to understand that tax authorities will view the second house as a commercial property. What are the implications of owning a commercial property in terms of my taxes and in terms of financing the second home? Thanks, DE."

A second home is just that -- a second home. Mortgage interest and real estate taxes are tax deductions on your Form 1040 Schedule A. No other concerns at the federal or state level.

Now when you go to sell your home, you may owe capital gains taxes. You'll need to meet the 2 our of 5 year rule for each property on which you want to exclude gains.

Eventuall you may want to sell both homes. And you have substantial gains on those homes, and you will probably want to exclude part or all of the gain from federal tax. Under the current tax laws, you can exclude up to $250,000 in gains on your main home (or $500,000 if you are married). In order to qualify, you will need to have owned and lived in the the house for a minimum of two years in the five years prior to the date of sale.

Additionally, you cannot take the exclusion more than once in any two-year period. So you will need to plan out your sales carefully. When you go to sell, you should sell one home first, then live in the other house for at least two years before selling again.

Essential Information:

• Selling Your Home: Capital Gains Tax

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