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Understanding taxes and your second homeA second home is a personal residence for part of the year. The rest of the time it may remain vacant or be rented out to guests. Here are other common characteristics of second homes:
- Usually far away from an owner’s main residence. This means a second home could be in another city or state. In fact, some mortgage lenders require it, stating a second home be at least 50 miles from the owner’s primary residence.
- Often purchased after a main residence is paid off. Buyers may purchase a second home for retirement or to vacation in another part of the country. It’s not required for a first home to be paid off before embarking on a second home purchase, however.
- Include tax benefits for owners. Reserving your second home for family-only use keeps things simple at tax time. Like a primary residence, you can deduct a portion of your second home’s mortgage interest and property taxes.
Tax benefits of second homesSecond homes come with a host of possible deductions from the IRS, but they depend on two key factors: whether you’re living in your second home more than you rent it out and how much money you’re taking in income from tenants. Let’s dive into the specifics:
- Mortgage interest deduction. If you rent out your home for less than 15 days a year, it’s considered a personal residence and you’re eligible for deductions like any other homeowner. You can deduct mortgage interest up to $750,000 on principal for properties purchased after 2020. Rental income (under the 15-day limit) is also exempt, so you don’t need to report earnings to the IRS.
- Home equity interest deduction. Staying 14 days per year means your second home is considered a residence. In addition to deducting mortgage interest, you may also be able to write off home equity loan interest. To qualify, you’ll need to have a mortgage on your second home and make continuous improvements to it.
- Property tax deduction. You can deduct property taxes on your second home, but if you take a property tax deduction on your first home, you may be ineligible to claim another for your second residence. There’s a limit of $10,000 per tax return (or $5,000 per person if married and filing separately).
- Owning a second home has personal and financial benefits, including tax deductions.
- You’ll pay property taxes on each home, but some can be deducted.
- Renting out your second home can affect how you report ownership to the IRS.