Can You Still Do Second Home Tax Deductions?
Owning a second home can be a rewarding lifestyle decision and a powerful wealth-building strategy, but it has significant tax implications. You could leave money on the table if you’re not leveraging all available second home tax deductions.
Here’s what you need to know about maximizing the benefits of your second home — whether it’s a vacation spot or an investment property.
Is the mortgage deductible?
As of the 2018 tax year, tax deductions for mortgage interest were limited to loans considered “acquisition indebtedness.” In other words, loan interest is only deductible to buy, build, or make significant improvements to a primary or secondary home. For example, the interest would still be deductible if you took out a home equity loan to renovate your kitchen with the latest smart appliances and high-end finishes. However, the interest would no longer qualify for a deduction if the loan was used for personal purchases, such as a classic Porsche 911.
This rule has been in place since 2018, and no previous loans were grandfathered in, so deductions many homeowners could claim before then became non-deductible. Suppose you had a home equity mortgage before 2018 but haven’t adjusted your tax strategy yet. In that case, reviewing how you’ve used those funds and confirming with your tax preparer whether any interest remains deductible is essential.
One key aspect of this rule is the tie between acquisition indebtedness and the property securing the mortgage. For instance, if a mortgage used to buy a second home is secured by that second home, the interest is deductible. However, the interest is not deductible if you used a home equity loan secured by your primary residence to purchase a second home. While this situation is rare, it’s worth conversing with your tax advisor if it applies to you.
Mortgage interest deduction limits
The IRS allows you to deduct interest on up to $750,000 in combined mortgage debt if the loan was taken out after 2017 (or $1 million if it was taken before).
Actionable tip: Calculate your total mortgage debt across both homes. If you’re approaching the deduction limit, a strategic plan can help you optimize your deductions without exceeding IRS caps.
Property taxes and the SALT deduction cap
The state and local tax (SALT) deduction cap is $10,000, including property taxes from your primary and second homes. If you live in a high-tax state, this limit can significantly reduce the benefit of owning a second home.
Actionable Tip: Review how your property taxes fit into the SALT deduction. If your combined property taxes exceed $10,000, consider strategies to offset the impact, such as exploring state-specific tax credits.
Tax benefits of renting out your second home
If you rent out your second home for part of the year, navigating the fine line between personal and rental property use is essential. The IRS has strict guidelines on how often you can use your home while qualifying for mortgage interest deductions.
If you rent the property for fewer than 15 days a year, you don’t need to report the income—but you also can’t deduct expenses.
If you rent it out for more than 15 days, rental income is taxable, but you can deduct rental expenses like repairs and maintenance in addition to the mortgage interest.
Actionable tip: Track your rental days and expenses carefully. Balancing personal and rental use strategically allows you to maintain eligibility for deductions while benefiting from rental income.
Capital gains tax and your second home
Eventually, you may consider selling your second home. Unlike your primary residence, which benefits from the home sale exclusion, capital gains on second homes are fully taxable. However, if you’ve lived in the home for at least two out of the last five years, you may qualify for a partial exclusion.
Actionable Tip: Plan ahead. If you’re nearing retirement or anticipate selling the property, living in it for a designated period can significantly reduce your capital gains tax liability.
Maximizing second home tax deductions
Owning a second home complicates your financial situation, but the right strategy can unlock significant tax benefits. You can maximize the return on your investment by aligning your mortgage interest deductions, property tax planning, rental income, and capital gains strategy with your overall financial goals.
Actionable Tip: Review your current tax strategy and consider how your second home fits into your broader wealth plan. The earlier you start planning, the more options you’ll have to optimize tax relief.
Get the expert guidance you need
The tax rules surrounding a second home are complex, but the potential benefits are worth the effort. From maximizing your mortgage interest deductions to navigating rental income and planning for capital gains, a wealth management advisor can guide you through the intricacies of tax planning, ensuring you get the most out of your second home.
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