Can I Deduct a Loss on My Second Residence?

Tax rules for second homes are complicated. A lot depends on how you use your second home. That will affect how you claim any losses, whether it's from storm damage, an accident or whether you lost money on a sale. The key factor is whether your second home is solely for personal use or whether you rent it out part of the time.

Personal Use Deductions

If a second home is solely for personal use, you can deduct casualty losses, such as damage from hurricanes, tornadoes or earthquakes. You'll have to fill out a Form 4684 with your 1040 income tax return and deduct any payments from insurance for the loss. If you sell a personal second home at a loss, you can't deduct it.

Rental Losses

Deducting losses on second homes with some rental varies. If you rent the house for more than 14 days a year, you must report that as income, but you can deduct expenses for maintenance, including damage from storms or other incidents. You have to limit your personal use to 14 days a year, but can exempt days you used the house to do maintenance.

Apportion Some Losses

You can apportion your losses if you use the house personally more than 14 days but no more than 20 percent of the rental time. Then you have to figure the percentage of personal time vs. rental and adjust any losses by that percentage. You also have to deduct any insurance payments or salvage value and, of course, report all rental income as taxable. If the home is a total loss, you claim the lesser of the adjusted value of the property or the decrease in market value.

Investment Loss

You can deduct loss on sale of a second home if it qualifies as an investment property. If your adjusted gross income is $100,000 or less, you may be able to claim a deduction for a loss up to $25,000. That allowance changes as your income goes up. You'll have to report the sale and loss on a Form 4797 and document that your personal use was 14 days or less or no more than 20 percent of the total rental time.

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