Can You Deduct Property Taxes on a Second Home?

Did you recently inherit a second home? Are you wondering how much it will cost to maintain the property? Is there any way you can offset that cost? How will you manage the expenses for both it and your current home?

During an already turbulent time, getting to these answers is crucial to deciding what’s best for you and your family.

In this article, you’ll discover what expenses you can potentially deduct should you decide to keep or sell any real estate that you inherit.

How does deducting taxes on a second home work?

One of the biggest maintenance expenses new owners can expect is property taxes, which is why they are the first thing heirs want to know how to offset.

Fortunately, under current tax laws, property taxes on any real estate you own, whether it’s a primary residence, vacation home, or investment property, can be deducted at the federal level from your income taxes.

The amount, however, will be limited to at most $10,000 a year. So, if your property taxes are more than that, you won’t enjoy any cost savings above $10,000.

Another key thing to note is you can only deduct property taxes that you pay after you inherit a property. Even if in the past you helped the previous owner pay them, and even if you inherited delinquent property taxes that had to be paid, you would not be able to deduct these.

For this reason, many heirs decide to sell the home instead. This is especially true if there are back taxes into the tens of thousands of dollars.

What costs are deductible when selling a home?

Typically, when selling a home that is your primary residence the expenses you can deduct when selling include advertising costs, appraisal fees, attorney fees, notary fees, local county recording fees, escrow fees, title search fees, real estate broker commission, real estate transfer taxes, as well as anything paid to assist the buyer to close, such as points to buy down their interest rate.

More so, the IRS is very generous and allows individual homeowners to exclude up to $250,000 in profit on the sale of their home from being subject to a capital gains tax. For married couples filing jointly, it's $500,000.

In action, this could look like the following favorable scenario: Peter inherits a property from his father valued at $300,000 and moves in with his wife and kids. Suddenly, in the white-hot real estate market, the home's fair market value has skyrocketed to $600,000, and they decide to cash in and sell. Because he files his taxes jointly with his wife, they will not have to pay what is called a capital gains tax on the profit of $300,000. Instead, the family can take that cash home, tax-free.

What expenses can you deduct when selling a second home?

When selling a second home, the same expenses that accrue when selling can be deducted. These will include the escrow fees, title fees, commissions, and document preparation costs.

However, unlike selling a home that is your primary residence, you will not be able to deduct the proceeds from your taxes. Specifically, when selling a second home, you will be forced to pay a capital gains tax on the profit. Fortunately, this tax is levied against the difference between the sales price and the market value of the home when you inherited it and not when it was first purchased.

For example, if you inherit a $325,000 home that your mother initially purchased for $240,000 and years later sell it for $400,000, you will only have to pay a capital gains tax on the difference between $400,000 and $325,000, or $75,000. You will not be responsible for the difference between $240,0000 and $400,000, which would be $160,000 or nearly double the tax.

This is credited to the step-up-in tax basis that happens automatically on the day you inherit a second home. It acts as an automatic deduction in the capital gains tax that you would otherwise owe when selling a second home.

How long do you have to live in a property to avoid capital gains tax?

In order to avoid capital gains tax in this way, you are required to live in the property for at least two out of the five years before you sell it. Furthermore, during that time it must have been only used as your primary residence.

Can you have two primary residences?

In the eyes of the IRS, you can never have two primary residences, only one. Even if you split your time evenly down the middle between two homes and only use them for personal purposes, you will be required to choose which one you will consider your main residence.

This means that the capital gains tax exclusion is only available to one property, and that any real estate you inherit does not automatically become a primary residence. It’s only until you move in, stay for two years, and then sell that you can avoid paying a capital gains tax when selling.

How do I avoid a capital gains tax on a second home?

Aside from living in the property for two years, the best avenue you have to avoid paying a capital gains tax on a second home is to donate it to an eligible charitable organization.

Donating real estate to charity makes your gain ineligible for the capital gains tax because the proceeds go to a nonprofit. In return, you can write off the net amount donated as a tax deduction for the next five years.

This is a move many make, including four siblings in Selma, Alabama, who decided that was the best option for them. After inheriting a property with major structural issues, they were faced with the choice of either sinking tens of thousands of dollars into fixing it, selling it, and covering the capital gains tax, or donating it to charity and receiving multiple tax benefits.

Upon speaking with a Giving Property representative and learning their donation could benefit the nonprofit Catholic Charities USA and their service work, it was an easy decision for the siblings. They decided to go ahead and donate the property, which was a decision that brought an incredible impact to the children of the charities and their families.

To learn more about how donating your own home can be an option for you, contact us at 844-277-HOME or fill out our form https://givingproperty.org/contact-us.

**This article is for informational purposes only and does not constitute formal advice. Individual tax situations may vary so please contact your tax advisor if needed.