Second Home Tax Breaks

Second Homes, or Vacation Homes, are effective tax shelters. Many people own more than one residence. If you own a second home, interest paid on loans secured by your mortgage for the second home qualify for home mortgage interest deductions. Real estate tax deductions also apply.

When used properly, a second home can be an effective tax shelter.

Second Home Definition

What is a second home you ask? Simple, it’s a residence that includes a house, condominium, mobile home, boat, or house trailer that contains sleeping space, a toilet, and cooking facilities. This definition allows the interest expense to be deductible for a yacht or motor home if the taxpayer chooses to treat the yacht or motor home as a dwelling unit.

Click here to learn about Second Home Tax Deduction requirements and examples.

Do You Own More than Two Residences?
If you own more than two residences, you must designate which residence is to be treated as your second home. The IRS has a two residence limit for deducting interest. The interest on mortgages on any additional home is nondeductible personal interest. When you own more than two residences you can change how you treat a second home during the year in the following situations:

      1. If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it.
      2. If your main home no longer qualified as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home.
      3. If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home.

You may treat a residence under construction as a qualified residence for up to 24 months. You can do this only if the residence becomes a “qualified” residence at the time the residence is ready for occupancy. This is an exception to the rule that the property must be used by the taxpayer as a residence. If the construction takes more than 24 months to complete, the interest after the 24th month and before occupancy is not deductible.

Is the Home a Vacation Home
As stated above, your vacation home is considered a residence if you use it personal purposes at least part of the year. If you rent it all year though, it is considered a “rental property“.

The IRS states that for your vacation home qualify as a residence, you need to spend at least 14 days there, or 10 percent of the amount of time that the property is rented. If you own a vacation home and rent it for less than two weeks, you get a tax break because you don’t need to report the rental income on your tax return. All that rental income is, essentially, tax free.

Vacation Home Example: Assume you own a second home, a vacation home, in a mountainous area that is very popular in the winter for skiers and in the summer for people who enjoy visiting the lake nearby your home. You rent your vacation home for 220 days during the year. Per the IRS, if you don’t use your vacation house in the mountains for 22 days (220 days of rental use X 10%) the IRS will consider the home to be a rental property and you will not be able to deduct your mortgage interest or real estate taxes entirely. Part of your mortgage interest and real estate taxes will be declared against rental income.