Buying a second home is a big decision and requires a lot of efforts on your end. It could well be that you already have a home and are planning for a holiday home or a weekend getaway or just for investment.However, amidst all this, do not forget that it comes along with a lot of tax considerations as well. Here are three major tax tips that you must consider before you write down that cheque.
It is no secret, that the tax rates of property or house largely depends on the location that you are buying it at. Few states and municipalities have higher tax rates as compared to others. Thus, a quick check of the location that you want to buy the house in would help you save considerably on taxes.
Places such as Hawaii, Louisiana, Delaware and Alabama have the lowest tax rates for real estate in the country. Ranging between 0.28% to 0.53%, they can be great options to buy your second home. And on the other hand, places such as Illinois, New Jersey, Wisconsin have the highest tax rates in the country.
Buying a property outside the country is a different equation altogether. Unlike normal classifications such real estate taxes, you might have to pay a one-time fee.
Should you pick a place and property smartly, the payoff can be quite satisfying. A good house in a good locality or upcoming locality will fetch you much better prices during selling. However, in hind sight do not forget the additional cost that they bring along with them.
While buying at lower prices and selling at higher prices means a lot of profit for you, being aware of the tax implication is also important. As the property value increases significantly, the taxes that you are eligible to pay would also increase considerably.
There is also a possibility that the White House decides to revisit the property taxes once every few years. If there is an increase in such prices, it would only increase the tax burden on you.
Interest on Mortgage
If you are planning to use the second property as a second home, there are some additional benefits to have had. However, these are possible only if you use the property as a second home and not rent the place out.
In such cases, the interest that you pay on your mortgage is deductible and behaves pretty much like the interest on the first house or property. Before 2018, taxpayers had the option to write off the entire interest amount that they paid if they had secured debts of up to $1.1 million on both the properties combines together. The amount is also valid if you choose to upgrade or improve the house in different ways.
The rules had been tweaked a bit where earlier the limit was set at $750,000. This can be a good and smart way of saving a substantial amount in taxes. It is quite common to rent out your second place. But you cannot avail the above benefits if you choose to do so. If you are looking to saves taxes, this method fares better results.
Whether it is your first property or second, if you have the option to save money on taxes, there isn’t any reason why you should not. The above tips are not only easy to follow but implement as well. If you are an NRI and are planning to buy your second home, these should help you save some money on taxes.