Homeownership is an aspirational dream that millions of people achieve every year. It represents so much more than just four walls and a roof. Owning a home signifies financial security, freedom, safety, and comfort.

For many homeowners, the desire to own more than one home is also a financial move. Growing your wealth through real estate has long been considered a relatively stable and safe investment.

In a town like Park City, where a large portion of our housing stock is comprised of secondary and investment properties, we get a lot of questions. One of the most common is: what are the tax implications of owning a second home?

Before we dig in, find out everything you need to know about buying a vacation home in Park City right here.

First, a Disclaimer

Although our resident finance expert, Steve Chin is, in fact, also a CPA, we always refer our clients to discuss all their tax questions with their tax advisor. This industry moves extremely fast and regulations and laws are always changing. It’s critical that you have someone on your side who is up-to-date with the latest information.

Additionally, each person is different. And what might apply to your friend or family, might not apply to you. Getting tax advice from someone who isn’t fully informed of your situation and goals could result in serious oversight and headaches that you certainly don’t want to deal with.

This post is not intended to be used as financial advice. For specific questions about your finances or taxes, please speak to your CPA or financial advisor.

With that in mind, let’s zoom out a bit and take a macro look at the tax implications of owning a second home.

Three Buyer Categories

In the eyes of Uncle Sam, homebuyers can fall into one of these three categories:

• Primary homebuyers
• Vacation/Secondary homebuyers
• Investment property buyers

Depending on the category you fit in, you might have some different tax ramifications to consider. Let’s break them down:

Primary Homebuyers

These are the people who are buying a principal home to live in. The government would classify a primary residence as the dwelling where a person lives most of the time. Most homeowners who own one property fall into this category.

Primary homeowners have a fairly straightforward tax file. They pay property taxes, utilities, and repairs from their bank accounts and in general, do not have many deductions for the property come tax time.

When you sell a primary residence, you are sheltered from some capital gains tax. For example, if you are a single person, you are not taxed on the first $250,000. If you’re married that doubles to $500,000.

Read these blogs next if you’d like to learn more about buying a vacation/investment property in Park City:

• Is Park City Good For Investors?
• Everything You Need to Know About Hiring a Property Manager in Park City
• Why Buy a Luxury Condo in Park City

Secondary and Vacation Homebuyers

This is where the waters can get a little murky! (And where consulting with your tax advisor becomes essential.) The tax implications of owning a secondary or vacation property depends entirely on the use of that property, and further to that, the definition of ‘secondary’ and ‘vacation’ property is different in the eyes of the law. 

For example:

• Do you live in the home for more than 6 months and 1 day per year?
• Do you rent the property when you’re not using it?
• Is your secondary property ever used to conduct business when you’re not using it?
• Do you plan to donate the use of your rental property to registered charities and organizations?
• Do more than one of these situations apply to your property?

There are very specific laws about the definition of a vacation home vs. a business property vs. a secondary property vs. a rental property, and where your home fits into this smaller sub-category has a lot to do with the taxes you pay throughout your ownership of the home.

Some other considerations when your vacation home is also used as a rental:

• Did you know you can rent for up to 14 days of the year without reporting the income?
• Some costs can be written off “pro rata” if your home meets certain requirements.
• You will need to keep track of your personal use days for the property and have a clear understanding of the definition of personal use and how many you can have. For example, do days when you are fixing up the property count towards personal use?

Tax laws change from state to state, so it’s essential to work with an expert who is familiar with the laws and regulations you need to abide by.

Other things like major improvements to the property can increase the value and result in different tax implications. It is essential to keep track of all costs when you have a vacation home that is also rented out.

Speaking of major improvements, should you update your home before selling it? Find out in our blog right here.

Investment Property Buyers

The last category is the investor. Owning an investment property is much different than owning a primary home. By definition, an investment property is a dwelling where you do not live, at any time, instead, you accept money from tenants to rent the home.

The sole purpose of an investment property is to generate income, and as we know, income is always subject to tax.

Expenses related to your income property can be written off. This includes interest on the mortgage, property taxes, condo fees, repairs, utilities, and more. If you don’t live in the same area as your investment property, you can also deduct travel expenses if you have to visit the property in some cases.

Why is Park City so popular for investors? Read these posts next to find out:

• Why Park City is the Best Home Base for Recreating in Utah
• 10 Reasons Why Artists Love Park City 
• Beyond of Slopes: How to Enjoy Park City Living Year-Long

What’s the most important thing to remember about deducting expenses from your income property? Keep all your receipts! You need to keep a record of all the expenses, which means receipts, are 100% necessary.

Working with a tax advisor is almost even more important when you have an investment property. For example, did you know the deductions you can write off could be limited if your overall income reaches a certain amount?

Selling an investment property almost always results in having to pay some capital gains. However, the exact amount that applies to you could change depending on various factors. That’s why we recommend talking to a tax advisor.

At the End of the Day, Your Tax Advisor Has the Answers

Whether you have a vacation home that is sometimes used as a rental or you own a property that is used as a rental 100% of the time, your best resource is your financial planner/CPA.

When purchasing a property used for anything other than a primary residence, you should be aware of any ramifications and be strategic about how tax laws work and use them to your advantage.

On the real estate side of things, that’s where we come in! With over 30 years of experience helping buyers and sellers in Park City, we can offer the best advice that will benefit you now, and in the future. 

Call us at 435-647-8035 or email info@cmfhparkcity.com to get started today!

Disclosure: This post is not intended as financial advice. For any questions about your unique situation, get in touch with your financial advisor or CPA directly.