First Time Home Buyer: Tax Questions

[ea1776]

My wife and I currently live in California, but want to purchase a home in Texas, as we plan on moving back there in the next couple years. We'd like to purchase now to take advantage of low interest rates, and also reduce our tax burden by getting to deduct mortgage interest.

Anyways, I read somewhere that the mortgage interest could still be deducted if you live in the home 14 days out of the year. Is this true? What are the main distinctions that qualify ability to deduct mortgage interest and property taxes, vs. not being able to deduct?

Thanks for any input, always appreciate this great forum.

[Petunia 100]

The 14 days of personal use rule applies to rental properties, not second homes. If you have a rental property, you may use it for up to 14 days annually and still call it a rental property.

You can deduct the mortgage interest on your vacation home on your schedule A, along with your other itemized deductions. You don't have to live in it at all.

However, I suggest you look into the total cost of buying the house now and letting it sit empty for several years. Property taxes are much higher in Texas than in California. You may find that it does not make financial sense.

[ea1776]

The 14 days of personal use rule applies to rental properties, not second homes. If you have a rental property, you may use it for up to 14 days annually and still call it a rental property.

You can deduct the mortgage interest on your vacation home on your schedule A, along with your other itemized deductions. You don't have to live in it at all.

However, I suggest you look into the total cost of buying the house now and letting it sit empty for several years. Property taxes are much higher in Texas than in California. You may find that it does not make financial sense.

Is mortgage interest deductible on a rental property?

[Petunia 100]

Is mortgage interest deductible on a rental property?

Yes. All expenses are deductible on a rental property. Maintenance, utilities, advertising, depreciation, etc. Every single cent you spend.

On a second home, only mortgage interest and property taxes.

[ea1776]

ok, thanks for your help.

[scubatim84]

The 14 days of personal use rule applies to rental properties, not second homes. If you have a rental property, you may use it for up to 14 days annually and still call it a rental property.

You can deduct the mortgage interest on your vacation home on your schedule A, along with your other itemized deductions. You don't have to live in it at all.

However, I suggest you look into the total cost of buying the house now and letting it sit empty for several years. Property taxes are much higher in Texas than in California. You may find that it does not make financial sense.

To put a number here, if you do a Google search you will quickly find that the city, school and county property taxes add up to an aggregate of between 2 and 3%. This is versus approximately 1.25% in California, depending on your county.

[riverwed070707]

To put a number here, if you do a Google search you will quickly find that the city, school and county property taxes add up to an aggregate of between 2 and 3%. This is versus approximately 1.25% in California, depending on your county.

Lets compare apples to apples here -- taxes may be a higher percentage, but real estate in general costs much more in California. If I have a $1m house wiht 1.25% taxes, I'm paying $12,500 a year in property taxes compared to the $4,000-6,000 I'd spend on my $200k Texas home. Not saying you can't find cheaper places in CA but percentages aren't the only factor.

To the OP, what do you plan to do with the home? I can assure you that there isn't an interest rate low enough for this to actually come out to be a savings for you, even if interest rates begin to trend up in the next couple years (which isn't even really likely). Additionally, while the tax deduction is nice to get back on something you're paying anyway, it certainly isn't a reason to buy. You aren't going to get back more than you paid in. It's a lose-lose deal. You'd be MUCH better off putting the money you'd be spending on house payments in savings and comeing in with a larger sum to put down on your house when you are ready to move.

[ea1776]

Lets compare apples to apples here -- taxes may be a higher percentage, but real estate in general costs much more in California. If I have a $1m house wiht 1.25% taxes, I'm paying $12,500 a year in property taxes compared to the $4,000-6,000 I'd spend on my $200k Texas home. Not saying you can't find cheaper places in CA but percentages aren't the only factor.

To the OP, what do you plan to do with the home? I can assure you that there isn't an interest rate low enough for this to actually come out to be a savings for you, even if interest rates begin to trend up in the next couple years (which isn't even really likely). Additionally, while the tax deduction is nice to get back on something you're paying anyway, it certainly isn't a reason to buy. You aren't going to get back more than you paid in. It's a lose-lose deal. You'd be MUCH better off putting the money you'd be spending on house payments in savings and comeing in with a larger sum to put down on your house when you are ready to move.

Thanks for chiming in riverwed. I was planning on coming up with a 20% down payment, then purchasing an investment property in Texas. We travel there frequently and there's a 98% chance we'll live there in the next couple years. I want to put a stake in the ground, generate some income, and lock in while the interest rates are low. I also feel good about the long term prospects of the market, and would plan on keeping the home forever. You think it's better to just hold off, save, and apply a larger down payment later?

[riverwed070707]

Thanks for chiming in riverwed. I was planning on coming up with a 20% down payment, then purchasing an investment property in Texas. We travel there frequently and there's a 98% chance we'll live there in the next couple years. I want to put a stake in the ground, generate some income, and lock in while the interest rates are low. I also feel good about the long term prospects of the market, and would plan on keeping the home forever. You think it's better to just hold off, save, and apply a larger down payment later?

Definitely. For starters, if by investment property you mean you plan to rent it, you won't be able to get as good of a rate to finance a non-primary residence (meaning it doesn't matter if its a second home or rental, if you aren't living in it, the super low interest rates won't apply to you). Secondly, managing a rental from afar is NOT fun. Thirdly, the costs of financing a home are far greater than any savings you might reap from a tax deduction or a couple points in interest. Rates aren't going to sky rocket, they will climb slowly. If you're able to put 20% down now, why not aim to put 50% down and do a 15 year mortgage in 2 years? *That* would be substantial savings. I suggest running the numbers for a few different scenarios and see what the associated costs, interest, etc will look like. I think you'll quickly see that unless your propery is in a really strong renters market and you're able to get an amount considerably higher than your housing payment, theres just no way its going to pay off in the long term and its a lot of risk for a little return.

[ea1776]

Definitely. For starters, if by investment property you mean you plan to rent it, you won't be able to get as good of a rate to finance a non-primary residence (meaning it doesn't matter if its a second home or rental, if you aren't living in it, the super low interest rates won't apply to you). Secondly, managing a rental from afar is NOT fun. Thirdly, the costs of financing a home are far greater than any savings you might reap from a tax deduction or a couple points in interest. Rates aren't going to sky rocket, they will climb slowly. If you're able to put 20% down now, why not aim to put 50% down and do a 15 year mortgage in 2 years? *That* would be substantial savings. I suggest running the numbers for a few different scenarios and see what the associated costs, interest, etc will look like. I think you'll quickly see that unless your propery is in a really strong renters market and you're able to get an amount considerably higher than your housing payment, theres just no way its going to pay off in the long term and its a lot of risk for a little return.

Thanks for the kind advice. We'll have to meditate very deeply on this. We were thinking landlording would be easier since my wife's parents would be in the rental property town. I guess we'll just hold off, and buy something we intend to live in when the time comes, putting down a more substantial down payment. One thing is for sure, we will NOT be buying anything in California!