Most people know that Uncle Sam helps make buying a home more affordable through the mortgage interest deduction. But, his generosity doesn't stop there. In fact, the Internal Revenue Service might even be willing to subsidize your vacation home because the mortgage interest deduction also applies to a mortgage secured by one second home as well.
Second Home Interest
The mortgage interest deduction lets you write off the interest on not only your primary residence, but also a second home. As long as your time-share condo is collateral for the loan and it has bathroom, kitchen and toilet facilities -- and you probably wouldn't have bought it if it didn't -- it counts as a second home. If you don't rent it out at all, it qualifies for the deduction even if you didn't use it during the year. But, if you did rent it, even for just one day, you must use it for the longer of 10 percent of the time you rented it out or 14 days.
Mortgage Interest Limits
Chances are you're not going to run up against the limits, but the only way to make sure all your interest is deductible is to check. As of 2013, you can deduct the interest on up to $1.1 million of mortgage debt on your main home and vacation condo combined. For example, if you already have a $1.5 million mortgage on your main home, your time-share mortgage isn't going to do you much good on your taxes.
The mortgage interest deduction is an itemized deduction, so you can't claim it if you're not willing to give up the standard deduction. If you only have a small mortgage on your time-share, and you've either paid off your mortgage on your main home or you're renting, the interest alone might not justify itemizing your deductions. So, you have to compare the total of your itemized deductions, which also includes charitable donations and state and local taxes, to your standard deduction.
If you're eligible, the mortgage interest from your time-share condo goes on Schedule A, along with any other mortgage interest you're deducting on your main home. If you get a Form 1098 from your lender, the deduction goes on line 10. If not, it goes on line 11. Then, the total of your itemized deductions goes on line 29 of Schedule A and gets copied to line 40 of Form 1040, where it replaces your standard deduction. It sounds like a lot of work, but it beats paying more taxes than you have to.
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."