Updated: Tax Rules for Second Homes

Second homes (i.e. vacation homes, rentals, investment) can be a good source of income, partly because the tax system treats them favorably. Income from rentals can be offset by some serious deductions, including depreciation. Additionally, some income may (keyword - 'may') be tax free.

New to the tax code is an update to the $250,000 ($500K for married couples) tax exclusion on the appreciation of your primary home. In the past, many folks simply made their second home the primary home for the 2 required years, then sold it to get the entire exclusion. The 'new' rules require that the time after 2008 be prorated. A bit convoluted. Here - details matter.

Check out this article from Kiplinger Magazine's online edition... here.