Understanding tax laws 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 residenceVacation homes are typically located in another city or state. In fact, some mortgage lenders require that a second home be at least 50 miles from the owner’s primary residence. Otherwise, it may be considered an investment property.
Often purchased after a main residence is paid offBuyers 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 buying a second home, however.
Include tax benefits for ownersReserving your second home for family-only use rather than using it as a rental property keeps things simpler 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 tax benefits 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 deductionIf you rent out your home for less than 15 days a year, it’s considered a personal residence and you’re eligible for itemized 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 deductionStaying 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 interest paid on a home equity loan. To qualify, you’ll need to have a mortgage on your second home and use the home equity loan for property improvements.
Property tax deductionYou 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). Example: Greg and Rodney live in Michigan and purchase a second home in Arizona to enjoy every winter. The home stands empty during the summer unless Rodney’s kids stay there. Since Greg and Rodney stay more than 14 days and have no renting income, they benefit from the same homeowner deductions as their first home.
- Owning a second home has personal and financial benefits, including tax deductions.
- You’ll pay real estate taxes on each home, but some can be deducted.
- Renting out your second home can affect how you report ownership to the IRS.