In any home loan situation, there are more factors at play than simply getting the best mortgage rates. Especially for people looking to purchase a second home or a vacation property, one of these additional factors is taxes.
Taxes are often the late guests to the party – they typically occur after a purchase is completed, and many people simply forget about them until they show up. At Primary Residential Mortgage, we can help you factor these costs into your mortgage so you don’t run into issues down the line. Here are a few specific tax areas to be aware of when buying a second home.
Know that tax rates will vary dramatically depending on where you purchase property. In addition, there are also many locations that offer much higher tax rates for people purchasing vacation homes compared with permanent residents.
Do some research on the tax levels in the area you’re looking at. States like Hawaii and Alabama have some of the lowest effective real estate tax rates, while states like New Jersey, New York or California have some of the highest.
Future Tax Increases/Other Fees
Your second property might appreciate in value and become a nice little investment to sell off down the line, but you have to know that taxes will increase as well in these cases. Property tax rates can increase along with your basic rate increase.
There are also other additional costs involved in a second home. If you’re outside the US, there are alien landholders’ licenses to worry about. You may have to pay a management company to take care of the property while you aren’t in it, or hire someone to turn it into a rental property if you so desire.
Deducting Mortgage Interest
Federal tax rules contain provisions regarding deducting mortgage interest paid on two or more residences at the same time. If you’re financing a second home, you can typically deduct interest on federal taxes up to $1 million in value.
If there’s a chance you’ll be spending over half your time in your newer property, consider changing your primary residence for tax purposes. The rates could be better in your new state, as long as you can provide proof that you’re living there over half the year. If you’re purchasing outside the country, there are situations where becoming a citizen of the new country will be the right move.
To learn more about mortgage loan tax issues to be aware of with second homes, or about any of our other services, speak to the brokers at Primary Residential Mortgage today.
*The views and opinions expressed are my own and do not necessarily represent the official policy or position of Primary Residential Mortgage, Inc.