Second Home Tax Deduction Requirements

Home mortgage interest and property taxes are deductible on your second home/vacation home. If planned properly, you may NOT have to report income from renting your second home. For a residence to qualify as a second home, or a vacation home, the taxpayer must:

      1. Not rent the home to anyone during the year.
      2. If your rent the home out, you must personally use it at least two weeks a year or 10% of the number of days the residence is rented out to others, whichever period is greater.

Rental Income from Vacation Home May Not Be Taxable
Note that you must rent it at a “fair” rental price. Also note that if your home is used by you as a residence and the rental use of your home during the tax year is less than 15 days, the rental income is not taxable.

If you rent out the second home at any time during the year and do not use it long enough, the second home will be considered an investment property by the IRS. All income in this case will be reported as rental income.

Fair Rental Price
As mentioned before, you must rent your vacation property at a fair rental price to qualify for the second home tax deduction. A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property.

Vacation Home / Second Home Tax Deduction Examples

The following examples show how to determine whether you used your rental property as home.

Second Home Tax Deduction Example 1 – Standard deductions apply:
Rick bought a vacation home in Lake Tahoe for $300,000 in 1995. He pays real estate taxes of $6,000 on the home and home mortgage interest amounting to $13,000 annually. Since he doesn’t rent out his vacation home, both the real estate taxes and home mortgage interest qualify for deductions amounting to $19,000.

Second Home Tax Deduction Example 2 – Rental Income is TAXABLE:
Patricia converted the basement of her home into an apartment with a bedroom, a bathroom, and a small kitchen. She rented the basement apartment at a fair market price to Susie. She rented to Susie on a 9 month lease (273 days). Using the 10% second home requirement, Patricia determined that the total days rented to others at a fair rental price is 27 days (273 days x 10%).

During June, Patricia’s sister Mikenzie stayed with her and lived in the basement rent free.

Patricia’s basement apartment was used as a home because she used it for personal purposes for 30 days. Rent-free use by her sister is considered personal use. Her personal use of 30 days is more than the greater of 14 days or 10% of the total days it was rented (27 days).

Second Home Tax Deduction Example 3- Rental income NOT TAXABLE:
Using Ricks scenario from example 1 above, let’s assume that Rick uses the vacation home 2 months during the summer and also uses it during the spring. Rick also rents the house during the winter for a total of 14 days for $300 a day resulting in an amount of $4200 (14 x $300). Since Rick rented out the home less than two weeks and personally used it at least two weeks, the $4,200 in rental income is not taxable. Thus, Rick’s deductible expenses and tax free income results in an aggregate amount of $23,200.

You can see the benefit of staying in the home to meet the 10% test if you rent your vacation home. You are getting the income tax free.

Second Home Tax Deduction Example 4 – Failure to meet the requirements:
Again using Rick’s info from example 1 above, let’s assume Rick rents his second home out in the winter for five weeks and he uses it only for 1 week. Since Rick failed to meet the requirements for the second home tax deduction test he will be limited in the amount of deductions he can take. He will also have to report the rental income as well. His house will be treated as a rental property.

This type of example is covered in the Rental Property section of the Real Estate Owner website under the “Rental Property Scenarios” section.