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Tax Cuts and Jobs Act Brings Changes for Owners of Vacation Homes

The 2017 Tax Cuts and Jobs Act brought with it sweeping changes to United States tax policy, the most significant changes we have seen in more than three decades—businesses, individuals, non-profits and other organizations all continue to adjust to this major piece of tax reform. 

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The 2017 Tax Cuts and Jobs Act brought with it sweeping changes to United States tax policy, the most significant changes we have seen in more than three decades—businesses, individuals, non-profits and other organizations all continue to adjust to this major piece of tax reform. 

The 2017 Tax Cuts and Jobs Act (TCJA) brought with it sweeping changes to United States tax policy, the most significant changes we have seen in more than three decades—businesses, individuals, non-profits and other organizations all continue to adjust to this major piece of tax reform. And while it may not be the first thing people think about when considering the impact of the Tax Fairness and Jobs Act, there is evidence it could be having an impact on people who own vacation homes as well. 

What is the issue? More likely than not it has to do with real estate taxes, which are no longer deductible once many taxpayers—including, likely, people who own second homes—have reached the $10,000 cap on deducting income and real estate taxes. 

It used to be fairly simple for people who owned vacation properties (or second homes) elsewhere in the country—the property tax paid on those properties could be written off when they filed their taxes each year, just as the taxes paid on their primary residences could. And the incentive of being able to deduct these payments was often enough to convince people that owning a second home was a worthwhile investment. 

That all changed with the TCJA. Under the new law, the deduction on real estate taxes is now limited to a total $10,000, and chances are that number is already consumed by the taxes paid on the homeowner’s primary residences. So where there once was a tax incentive to own a second home or vacation home, the TCJA took that away. Many people who own second homes are now realizing this, and some of them are surely once again weighing the benefits of having an additional property and wondering if it is worth it. 

However, there could be solution for people in this situation, one which could continue to make it worthwhile to own a second home: rental income. Not every second home is used as a vacation rental, but it could now be an option for people to offset the loss of the tax deduction.  

For example, say someone has a home on Martha’s Vineyard that could conservatively rent out for $3,000 per week. And say that person pays $15,000 a year in taxes on that property. The rental income could help the cash outlay of the property taxes paid in just five weeks, therefore reducing the impact of the loss of the property tax deduction. For those who don’t mind opening their vacation homes to the public, this could be a solution to the TCJA that works well for them. 

As with just about every aspect of the TCJA, people continue to learn the intricate details of it, even 18 months after it was signed into law. Those who own vacation homes should be aware of how the TCJA impacts them before getting surprised at tax time, and the sooner they know what their new tax liability is, the sooner they can perhaps find new solutions.  

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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