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Friend of Clear Harbor, 

As we approach the 2023 tax filing deadline, we hope you found last month's newsletter beneficial, and perhaps you were even inspired to contribute to, or open, an IRA. A friendly reminder that you can still contribute to your 2023 IRA until April 15.

This will be the last newsletter addressing tax considerations until November, when we will discuss a host of tax planning tips to close out the 2024 tax year. As always, please reach out to your Clear Habor advisor if you have any questions. 


The Clear Harbor Advisory Team

Personal Residence and Vacation Home Tax Planning

Personal residences, vacation homes, and rental properties provide fertile ground for tax planning. There are opportunities to deduct mortgage interest, points, closing costs, or depreciation. Concurrently, there may be tax ramifications of owning vacation homes or renting your principal residence to someone else.

If you sell your personal residence, it is important to understand how to report capital gains and losses and to become familiar with the new rules regarding the exclusion of capital gain income. Special rules may apply if you sell your principal residence, a vacation home, or rental property that was once your principal residence or if you transfer a personal residence into a trust.

Tax definition of a vacation home

From a tax perspective, rental properties with personal use by the owner generally fall into one of four categories:

  • Personal residence--Typically, this is a residence that is not rented at all or is rented for fewer than 15 days during the year. If it is your primary place of abode, then it is your principal residence.
  • Vacation home--This is a second residence with a combination of personal and rental use. The home is rented 15 days or more per year, and personal use exceeds the greater of 14 days per year or 10 percent of the days rented. Vacation home tax rules will apply.
  • Second home--If you have a second home/vacation home that is rented less than 15 days per year, and your personal use exceeds the greater of 14 days per year or 10 percent of the days rented, the second home tax rules apply.
  • Rental property (with or without personal use) -- This is property used personally for fewer than 15 days per year or, if greater, for 10 percent or less of the rental days.

Deductibility of home mortgage interest, points, and other closing costs

If you own a home and itemize deductions on Schedule A of your federal income tax return, your ability to deduct mortgage interest paid can provide significant tax advantages to you. 

  • Generally, you can deduct interest you pay on qualified home mortgages on up to two residences that you own (your primary residence and a second residence), subject to certain conditions. 
  • The date on which you took out a mortgage is particularly important. Special rules may apply regarding the deductibility of interest paid on refinance mortgages and interest paid on home construction loans.
  • Your ability to deduct points and other closing costs can also prove advantageous. For instance, if you pay points on a refinanced loan rather than on a purchase money mortgage, the tax treatment may differ. Closing costs can also affect the tax basis of your home.

Tax considerations of owning a vacation home, converting a personal residence to rental property, and temporarily renting a personal residence

If you own income-producing property, you will need to understand how to report the income or loss, and what deductions are available. Your ability to deduct depreciation may prove to be a particular tax advantage. Tax treatment will vary, depending on the type of income-producing property you own and the amount of time that it is rented.

Transfers and sales of homes

Although home ownership offers several tax advantages, the sale or transfer of your residence can prove advantageous as well. Generally speaking, the adjusted basis of a personal residence is the cost of the property plus amounts paid for capital improvements, less any depreciation and casualty losses claimed for tax purposes. Regular repairs and maintenance are not considered improvements.

Regarding the sale of a vacation home, any gain must be calculated as if you had owned two properties--one for personal use and one for rental use.

  • The gain attributable to the personal use portion is reportable as capital gain.
  • The gain attributable to the rental portion of the vacation home is considered part ordinary income and part capital gain. 

Unlike the case of a principal residence, you aren't allowed a capital gain exclusion when you sell a vacation home, second home, or rental home. If you own and use the property as a principal residence for two out of the five years preceding the date of sale, you may qualify for capital gain exclusion even though the home was a vacation home for the balance of the five-year period.

State of domicile (or tax home)

Although you may own homes in a number of different states, you generally can only have one domicile or permanent home for tax purposes. If you are considering a state of domicile change, the most important element is making certain the state you are leaving honors your domicile change. Remember, the onus is on the taxpayer to prove their domicile in this new state, which can include items such as where he or she votes, works, and which state issued the driver's license, among others.

Divorce and the marital residence

If you are separated or are contemplating a divorce, it will be helpful to understand the tax consequences when a home is transferred or sold incident to a divorce. A number of special tax rules apply.

Real property taxes

You may be able to lessen your tax burden if you are able to obtain property tax relief or exemptions and/or contest property tax assessments. Common property tax reductions are available to veterans, surviving spouses, and homeowners who recently made energy-efficient home improvements.

Prepared with Broadridge Investor Communication Solutions, Inc. Copyright 2024

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Disclosure: Clear Harbor Asset Management, LLC (“Clear Harbor”) is an SEC registered investment adviser with its principal place of business in the State of Connecticut. SEC registration does not imply a certain level of skill or training. Clear Harbor and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which Clear Harbor maintains clients. Clear Harbor may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.

The material contained herein is intended as a general market commentary. The commentary may contain general information and views that are not directly relevant to your particular account. Opinions expressed herein are those of Clear Harbor Asset Management, LLC. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Any comparison to an index, including the S&P 500 and Russell 2000, is for comparative purposes only. An investment cannot be made directly into an index, which are unmanaged and do not reflect the deduction of advisory fees. This brochure is limited to the dissemination of general information pertaining to its investment advisory services. The current account composition is intended for informational purposes and allocations are subject to change. Clear Harbor does not offer tax advice and a tax advisor or professional should be sought for specific tax advice based on the individual's specific circumstances.

For information pertaining to the registration status of Clear Harbor, please contact Clear Harbor or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Clear Harbor, including fees and services, send for our disclosure statement as set forth on Form ADV from Clear Harbor using the contact information herein. Please read the disclosure statement carefully before you invest or send money.