Believe or not, your Uncle Sam might be willing to help you purchase a second home by letting you deduct the mortgage interest you pay. The higher your income tax bracket, the more valuable the deduction is for you. Before you rush off to buy, however, make sure your home qualifies.
Possible Second Homes
Just because it’s humanly possible to live in something doesn’t make it a home for tax purposes. To be a home, the building or vehicle has to have sleeping, bathroom and kitchen facilities. Therefore, even if you love your new BMW convertible so much that you sleep in it a few nights a week, it still won’t qualify. However, if you buy an RV or boat that meets the requirements, you can write off the interest on the loan.
Qualifying Second Homes
Uncle Sam won’t let you use the mortgage interest deduction on just any second home. The house must meet one of two criteria. First, the home qualifies if you do not rent it out at all during the year. Second, if you do rent it out, you have to use the home for personal use for the longer of 14 days or 10 percent of the time you rent it out. For example, if you rent out the home for a week during the year, you’d have to use the home for at least 14 days for it to qualify. Alternatively, if you rent the home out for 250 days during the year, you have to use it for at least 25 days to qualify.
Only One Second Home
Uncle Sam’s generous, but not too generous, because you can usually only deduct the interest on one second home during the year. If you want to change which home you use as a second home, you have to wait until the end of the year unless you meet one of the exceptions. You can change which home you use as a second home mid-year if you get a new home and choose to use that as your second home from the time you buy it. If your main home becomes a second home, you can treat it as the second home from that point forward, and if you replace your second home you can use the replacement right away.
Limits on Interest Deductions
You can only deduct the interest that accrues on the first $1 million of mortgage interest on both your main home and your second home, but this isn’t an issue for most people in their 20s and 30s. If you’re married filing separately, the limit is cut in half to the interest on the first $500,000. For example, if you have an $800,000 mortgage on your main home and a $450,000 mortgage on your second home, you could only deduct 80 percent of the mortgage interest you pay during the year.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."