Those who rent and use vacation property likely purchased the real estate with tax savings in mind. Although these tax savings may still be available, the passage of the Tax Cuts and Jobs Act (TCJA) has changed how taxes are applied to second properties.
Three specific changes that directly impact second properties used as both vacation properties and rental properties include:
- Standardized deduction increase. The TCJA increased the standard deduction to $12,000 for single filing taxpayers and $24,000 for married filing joint returns. This increase could mean the tax deductions normally taken for the second property no longer add up to exceed the standard deduction amount. As such, it is important to review these deductions, like mortgage interest and property taxes, to see if the itemized deduction amount still beats out the new, increased standardized deduction.
- Change to home-mortgage interest deduction. The new law also limits the amount of home mortgage debt a property owner can take on the second property for itemized qualified residence interest expense deductions. This limit is currently set at $750,000 for costs used to purchase or improve the property for a married filing jointly couple, half that amount for a single filer.
- Loss of home-equity debt deductible. In the past, homeowners could deduct up to $100,000 of home-equity debt for a married couple filing jointly (again, half the amount for single filers). The TCJA essentially eliminates this deduction. A fraudulent attempt to take the deduction could result in an audit.
It is also important to note that many of these changes are only good through 2025. As such, it is wise to carefully review your tax strategy with this potential sunset date in mind.