When you sell a rental property, you will have to pay taxes on any profit you make on the sale and to recapture any depreciation you took on the property while you owned it. You might owe state taxes as well.

QUESTION: We have recently bought a second home in New Hampshire. At some point, we might retire there, but in the meantime want to use it as a vacation home and also possibly as a rental. What are the tax implications of each use – vacation home and rental property? How much can we rent it without the home becoming an investment property?

ANSWER: When you own a rental property, it is an investment for you. The rental money is income to you and your expenses to maintain the property are deductible business expenses. When you own an investment property, you also have the ability to depreciate the value of improvements to the property over a period of time up to 27.5 years.

When you sell a rental property, you will have to pay taxes on any profit you make on the sale and to recapture any depreciation you took on the property while you owned it. You might owe state taxes as well.

If you use the home most of the year for your own personal use and rent it out for less than 15 days a year, it would be considered a vacation or second home. Generally, if you own a second home that has been primarily used for your own personal use, you will have to pay taxes on the capital gain if and when you sell it. Any money you put into the home to renovate it and make capital improvements to the home will increase your basis.

The term “basis” is used by the IRS and is generally the amount the property cost you, including all closing costs, plus all allowable capital improvements you have made to the home while you owned it. The basis is used to calculate any profit (and tax owed on that profit) you make on the sale of the home.

You should talk to your tax preparer about your plans for the second home and how those plans will affect your taxes. IRS publication 527 on residential rental property is also a good resource.

Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: lrgoodspeed@comcast.net.