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2 tax consequences to consider before buying a second property

There are many advantages to owning a second property. In addition to diversification of your investment portfolio, a second property can allow you to make the most of an area you love.

Owning a property in a warmer location to escape the winter snow or in the mountains to take advantage of outdoor winter activities can make a lot of financial sense. However, it is important to keep in mind that this type of investment has unique tax implications. Two specific tax considerations to keep in mind include:

 

  • Mortgage interest deduction. It is possible to take advantage of a mortgage interest deduction on your tax returns for a second property. However, it is important to note that the recent tax law has changed this deduction. The Tax Cuts and Jobs Act of 2017 has reduced this deduction to a total of $10,000.
  • Rental income. You may consider renting out the property to help cover the cost of the purchase. This can be a good financial strategy, but be sure to take into account the fact that the funds gained from renting the property may be considered income. If so, you will need to report the funds on your tax returns.

It is wise to have a proactive conversation about the impact of this type of purchase before investing in a second property. Various professionals can provide valuable counsel to this conversation, including a tax attorney. A tax lawyer can reduce the risk of any surprises at tax time by pointing out the potential tax implications of the purchase.

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