No matter how many houses you own, the IRS says you can only pick one as your second home. That's the only house beside your main home for which you can write off mortgage interest, except as a business deduction on a rental house. You can pick one house one year, then a different one the next year, so the choice isn't set in stone.
How Big Is the Mortgage?
You can only deduct mortgage interest on up to $1 million of mortgage debt. That's on your first and second home combined, not per house. If you own a $600,000 house, then buy a $600,000 vacation home, you can only deduct the interest on $400,000 of the second mortgage. If you take out any home equity loans on either or both homes, you can only deduct interest on up to $100,000 of that debt.
Is It Rented Out?
If you use your second home as a rental property, you have more options for deductions. Repairs on a vacation house aren't deductible, but repairs to a rental home are a legitimate write-off. You can claim mortgage interest on a rental even if you don't itemize deductions. The cost of major improvements to the house gets written off over time, through depreciation. Even driving across town to work on the house counts as a deduction.
How Often Do I Stay There?
If you use a house as both a second home and a rental, you divide up expenses between the two uses. If, say, you're there three months of the year and rent it out nine months, you can only write off 75 percent of expenses as rental deductions. If you or your family or friends use the house less than either 14 days or 10 percent of the time it's rented out, then the IRS treats it as 100 percent rental and not a second home at all.
What Happens When I Sell?
When you sell a second home, you pay capital gains tax on the difference between your adjusted purchase price and your sale price. Adjustments include improvements: if you spend $10,000 putting a new roof on a house you bought for $300,000, you figure your gain as if your purchase price were $310,000. This is very different from when you sell your primary home: many homeowners can exempt up to $500,000 of their gains from the sale of their primary home from capital gains tax. It's wise to take into account any possible capital gains tax when you plan to sell a vacation home.
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