Second homes can offer enjoyment and escape. However, they also generate higher expenses. New property taxes are adding another layer of expenses for second and luxury homes in various locations. These were recently nicknamed the “Taylor Swift property tax” after Rhode Island imposed new taxes on luxury second homes, including Taylor Swift’s $17 million mansion.
Who Now Pays Additional Taxes?
Currently, higher property taxes for second and luxury homes are imposed in Rhode Island, Montana, and Los Angeles. Connecticut imposes a tax on luxury homes, but only on those gifted versus purchased.
- Rhode Island now charges an additional $2.50 per $500 of assessed value above the initial $1 million. This equals $500 for each $100,000 increment of property value in excess of $1 million. As an example, a $2 million home would pay an additional $5,000 in taxes per year.
- Montana increased the residential property tax rate for second homes and short-term rentals by 0.55% to 1.9%. This equals $550 for each $100,000 of property value. As an example, a $2 million home would pay an additional $11,000 in taxes, with a total tax liability of $38,000 per year.
- Los Angeles charges higher taxes on all property transactions in excess of $5.3 million. This “mansion tax” only applies at the time of a real estate transaction versus every year. However, the rates are significantly higher. An additional 4% tax is assessed on sales of $5.3 million up to $10.6 million. The rate increases to 5.5% on sales in excess of $10.6 million.
The list of where taxes are increasing for second and luxury homes could be expanding. Washington state and Cape Cod are exploring additional taxes, and the trend could continue.
What Are the Additional Tax Impacts of Second Homes?
While property tax surcharges are relatively new, other tax impacts have existed for years.
- No homeowner exemptions: Primary residences often qualify for homestead exemptions that reduce their property’s assessed value. Since second homes do not qualify for these exemptions, their owners already pay a higher property tax.
- Federal tax deduction caps: For personal-use second homes, the federal deduction for state and local taxes (SALT) is capped. This can limit a second-home owner’s ability to deduct property taxes from their federal tax return. Mortgage interest is also capped for any loan balances in excess of $750,000 on the combined debt of your primary and second home(s).
- No capital gains exclusion: When selling a primary residence, homeowners can exclude a significant amount of capital gains from their taxable income. This exclusion does not apply to second homes, making any profit on the sale of these properties fully taxable.
- Lost Tax Benefits for Mixed-use (part personal, part rental) Properties: Many individuals buy second homes with the intention of renting the home for tax benefits. However, the majority of these benefits are lost if you use the property for personal use for more than the greater of 14 days or 10% of the rental days.
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