That cottage near the beach or cabin on a lake can be more than a good vacation retreat. If you can afford payments on two mortgages, a second home can give you a nice tax break. If you own two homes it pays to be aware of Internal Revenue Service rules. You'll have to file income tax Form 1040, the "long" form, and itemize all your deductions.
You can deduct all of the interest on both homes, up to a total of $1 million in mortgages if you're married and filing jointly. If you are single or filing separately, it limits the deduction to a total value of $500,000. In other words, if your primary home is mortgaged for $600,000, you and your spouse can get a second mortgage up to $400,000 and deduct interest on both loans.
It Must Be Residence
You'll have to spend at least 14 days a year at the second home to claim it as a residence for tax purposes. The mortgage must be in your name and on the specific property. You cannot deduct interest on a loan secured by property other than the second home. Refer to IRS Publication 936 for a specific work sheet to verify your eligibility.
Real Estate Taxes Are Deductible
You also can deduct all real estate taxes on both homes, even if they are in different states, as long as both mortgages are in your name and both meet the personal residence requirement. You cannot deduct any repairs, maintenance or insurance for a personal residence.
Rules for Rental
If you rent out your second home part of the year you can still qualify for some tax deductions on it. You can qualify it as a personal residence if you spend at least 14 days or 10 percent of the rental time there, whichever is greater. In other words, if you rent it out 200 days a year, you must spend at least 20 days there yourself. Personal use includes use by family members or others who do not pay full market value rental rates for the home. You must document the rental income on your tax return and break down percentages of time used personally, time vacant, and time rented to write off the percentage of interest for personal use.
Other Rental Rules Differ
If you rent the house full time, you have to file a Schedule E, Supplemental Income and Loss, form to calculate interest deductions. You also might be able to deduct some maintenance, utilities and other costs as operating expenses for the rental. You'll have to account for days rented, days empty and days for personal use and figure percentages according to instructions for Schedule E.
- Can I Deduct a Loss on My Second Residence?
- Can You Claim Rental Mortgage Interest as an Itemized Deduction?
- Can I Deduct Taxes on a Time Share Mortgage?
- The Advantages & Disadvantages of Buying a Second Home
- Rules for Buying a Non-Primary Home
- Deducting a Second Home
- Can I Claim a Loss for an Empty Rental Home?
- What Can You Deduct on Your Taxes as a Homeowner With Rental Income?