Investing in real estate continues to be one of the smartest ways to diversify your assets. Plus, owning a second home in a beautiful real estate gem like Virginia Beach or surrounding areas definitely has some perks. But are there appealing tax benefits to owning a second home in Virginia?
There are some available tax breaks for second homes in Virginia. It’s essential to carefully examine federal and Virginia-specific tax laws to make sure you’re maximizing your return when buying a second home.
Second Home vs. Rental Home in Virginia
For tax purposes, the state of Virginia considers a “second home” a residence owned in addition to a primary home and used personally by the owner for at least part of the year.
The IRS distinguishes second homes from rental properties based on how often the owner uses the home for personal purposes versus how often it is rented out. Rental properties have different tax rules than second homes – but you can claim rental deductions on a second home in some cases.
Note: Rental days and personal use days have specific definitions. [Click here to learn more about what qualifies as a rental day versus a personal use day.]
Whether legally considered a rental property or a second home, owners are still responsible for complying with regulations such as homeowners insurance and property taxes. If you purchase or inherit a second house, make sure to keep all homeowner expenses organized and paid.
Understanding Federal and Virginia Tax Benefits of Second Homes
There are both federal and state criteria that a second home must meet to qualify for certain tax deductions. Always consult with a tax professional who is familiar with both federal and Virginia tax laws to maximize your second home benefits.
At the federal level, second homes are generally subject to the same tax rules as primary residences. There are some limits that may apply. In Virginia, the general tax treatment of second homes aligns with federal rules. Property taxes for second homes in Virginia are subject to local rates, which vary depending on the location.
In this article, we will explore the following tax rules and benefits to owning a second home in Virginia:
Mortgage Loan Interest Deductions
Property Tax Deductions
Home Improvement Deductions
Depreciation and Capital Gains on Second Home
Maximizing Mortgage Interest Deduction for Second Homes in VA
To maximize your investments, it’s a good idea to know how to deduct mortgage interest on a second home in Virginia. The mortgage interest deduction is one of the key tax benefits for second-home owners. However, it comes with specific limits and conditions, both at the federal and state levels.
Under the federal 2017 Tax Cuts and Jobs Act, you can deduct mortgage interest on a combined total of $750,000 of mortgage debt for homes (and second homes) purchased after December 15, 2017 if you itemize. If your combined mortgages for your primary residence and second home exceed this limit, only the first $750,000 is deductible.
Note: If you purchased your home before December 15, 2017, you may still be eligible to deduct interest on up to $1,000,000 of combined mortgage debt.
Second homes in Virginia don’t have any additional limits beyond the federal rules for this deduction, but you can claim the mortgage interest deduction on your state taxes in Virginia if you itemize both your federal and state returns.
*A note on mixed-use properties: To qualify for the mortgage interest deductions on second homes in Virginia, the home must be used for personal purposes for 14 or more days per year or for 10% of the time it is rented out (whichever is more).
**Another note on mixed-use properties: Rental owners may be able to deduct a portion of their mortgage interest as a business expense – which wouldn’t count toward the $750,000 rule for first and second homes.
Property Tax Benefits for Second Homes in Virginia
Having deductible property taxes on a second home can be a major tax benefit for homeowners who itemize their deductions. Federal tax law allows for a total state and local property tax deduction of $10,000 per year – which is for all of an owner’s property taxes combined.
All Virginia homeowners must pay their local real estate taxes on all properties, including second homes. Property tax rates for second homes in Virginia vary depending on the locality.
If you have deductible property taxes on your second home, you will itemize your taxes when you file your return. You’ll deduct your property taxes in the year you pay them.
Virginia Rental Income Tax Considerations for Second Homes
If your second home in Virginia is rented out for more than 14 days per year, different tax rules apply. This is known as a “mixed-use” property, where you’ll need to report all rental income as a business and can deduct rental expenses.
To qualify for the mortgage interest deduction on a second home that you also rent out, the home must be used for personal purposes for at least 14 days of the year or 10% of the time it is rented out (whichever is greater).
Fair rental days are when a tenant is paying a fair rental price to use or live at the property for that day. For tax purposes, you’ll calculate days even if the tenants are paying monthly or annually.
Common examples of personal use days are when someone with an ownership interest (or their family) uses the property as:
A personal residence
A vacation house
An exchange for another house
An investment property rented at less than a fair rental price
When a significant part of a day is spent on maintenance or repairs, this is not considered personal use of the property. They aren’t fair rental days, but they are part of your rental business operations.
Speaking of which, here are some ways to maximize the resale value of a rental home.
Example of Mixed-Use Property Calculations
Kevin’s property in Virginia Beach was rented out for 100 days last year. He spent 16 days living there himself while vacationing with his family.
He spent an additional five days on the property repairing the porch and updating the landscaping, but as those were for rental maintenance, they don’t count toward his personal use days.
Kevin’s personal use percentage of the property is 16%. When he completes his taxes, he’ll apply that 16% to his interest and property tax deductions to decide how much of each expense can be included on his Schedule A as an itemized personal expense vs. how much can be deducted against his rental income on his Schedule E. Other rental expenses (maintenance, depreciation, utilities, etc.) should also use the personal use percentage to accurately allocate his claims.
By carefully separating repairs from improvements and allocating expenses proportionally, Kevin maximizes his eligible deductions while staying compliant with tax rules.
Second homes that are considered rental properties in Virginia don’t have separate tax rules beyond what is set federally. However, the IRS does have guidelines for reporting rental income and deductions. Localities may also have their own taxes or regulations for short-term rentals. (Here’s Virginia Beach’s short-term rental laws.) Always consult a CPA before filing your taxes!
Depreciation on Mixed-Use Second Homes in Virginia
You may be able to claim depreciation on a second home in Virginia that’s also being used as a rental property. But when you sell a home that was seen as a "mixed-use" property by the IRS, expect to pay a Depreciation Recapture Tax when you sell the home.
Depreciation deductions are available for investors to recover the cost of their property over time if it’s being used as a rental property.
Whether you take the depreciation deduction, the IRS assumes you did and requires you to pay the Depreciation Recapture Tax when you sell it. That means, for the portion of the time the property was rented each year, you should claim depreciation on the home’s value.
The tax rate for this is 25% of the depreciation amount that was taken (or that could have been taken). It will only apply to the portion of the property’s value associated with rental use. So, if you claimed $30,000 in depreciation on your rental over the years, you’d owe $7,500 in Depreciation Recapture Tax for the tax year you sold the property.
Capital Gains Tax Considerations on Second Homes in Virginia
Capital gains tax exclusions are usually available from the IRS when you sell your primary residence, but do you have to pay capital gains tax on a second home in Virginia?
To be eligible for the personal property capital gains exclusion, you must have owned and used the house you are selling as your primary residence for at least two of the last five years before the sale. Additionally, you cannot have claimed the same capital gains exclusion on the sale of another property within the past two years.
So if you’ve only been using the property as your vacation home or second home and not your primary residence, you are likely not eligible to use the exclusion. You’ll have to pay capital gains, which will be calculated based on several factors such as how long you’ve owned the home and what kind of profit you’re making off the sale.
You could also make the property your primary residence for at least two years, then sell it to avoid capital gains taxes.
Virginia-Specific Tax Benefits on Second Homes
There are a few home improvement tax deductions available for second homes in Virginia. There are specific criteria for each, so it’s important to consult with a tax professional familiar with Virginia laws if you think they might apply to you.
Upgrades that add value to your home (such as kitchen remodeling, roof replacements, or bathroom updates) aren’t immediately deductible, but they increase the cost basis of your home. You can subtract those costs from the sales price when you sell to reduce your capital gains taxes.
If you make updates to your second home that improve accessibility, you may be eligible for Virginia’s Liveable Home Tax Credit. The credit was created to improve the universal viability of homes in Virginia, and your renovations could qualify for up to $6,500 in tax credits.
If you have a second home or rental property that is a certified historic structure, you may qualify for Virginia’s Historic Rehabilitation Credit. This could allow you to claim up to $5,000,000 on your return if you are rehabbing the property. (Learn more about it here.)
The Bottom Line
There are several tax benefits of owning a second home in Virginia, and understanding your eligibility for them is key to investing with confidence.
To maximize your tax benefits for a second home, be sure to keep detailed records, familiarize yourself with all the tax savings in Virginia and federally, and work with a trusted tax advisor who can give you tips for second home deductions.
Ready to look for your second home investment in Virginia? Explore second-home opportunities in Virginia Beach with CGP Real Estate—your trusted guide to maximizing real estate value.