Whether or not you must report a second residence on your federal tax return depends on several factors: What type of property is it? Is the home for personal use or is it a rental unit? Do you have a mortgage on the property? You may miss out on additional deductions if you don't claim the second home, or incur a penalty if you fail to report a rental unit.
The IRS has fairly lenient rules when it comes to defining a residence. Did you know that a boat, mobile home, condo, co-op or recreational vehicle all qualify as a "residence"? As long as it has sleeping, cooking and toilet facilities, it counts. If you have more than two homes, you can choose which two you consider your primary and secondary residences in order to claim allowable tax breaks. And there are plenty of tax deductions associated with owning a home.
If you use the unit as a private residence and paid for it with a mortgage or loan secured by the property, you can take a home-mortgage interest deduction on your personal income taxes. So you're losing out on a valuable tax break if you don't claim the house (or trailer, sailboat, etc.). Besides mortgage or loan interest, you can claim a deduction for property tax due on both homes. Make sure you're not missing out on lowering your tax bill if you do own any of these non-traditional residences.
When your second property is a rental unit, you must report the income received, even if it was unoccupied for any part of the year. The good news is that you can also write off the mortgage payment, interest, utilities, depreciation, repairs and any other reasonable expenses you incur in keeping the rental property maintained. You can claim these expenses using Schedule E, even if you didn't receive rental income but attempted to find a tenant. This can drastically reduce your tax bill. But failing to report rental income will get you in trouble.
If you don't report the income on a second home that is rented out, and the IRS discovers the omission, or you substantially understate tax owed, you are liable for paying back taxes as well as interest on the unpaid amount and penalties. Recently the IRS increased the severity of penalties, and you can be fined an additional amount up to 20 percent of the underpayment due to negligence or disregard of tax regulations. The IRS imposes a 40 percent penalty for gross misstatements and intentional tax evasion, and failure to disclose foreign assets.
- Creatas/Creatas/Getty Images
- Things to Know About Capital Gains on Real Estate
- What Are the Tax Pros & Cons of Declaring Your Second Home as a Rental?
- Tax Consequences of Converting a Rental Property Back Into a Dwelling
- Owner Occupant vs. Rental Property
- Things Landlords Should Know About Taxes
- Can I Claim a Loss for an Empty Rental Home?
- Things to Know About Owning Rental Property
- Tax Deduction for Investment Property