Types of second residences
There are many types of second home tax deductions, but whether or not you qualify for them largely depends on how the IRS classifies your property. The three classifications are:- A second home that you live in part-time or use for vacation is a true second residence. The IRS will classify this type of home as a personal residence. However, since it isn’t a primary residence, you might still be disqualified from some of the tax breaks you usually claim on your main home.
- A second home you stay in and rent out often is classified as a mixed-use property or a personal residence with caveats. This is the second-home middle ground where homeowners may qualify for primary and rental property tax breaks.
- A second home you rent out most or all of the times considered a rental or investment property. These properties often qualify for different tax breaks and perks than a standard second residence.
Second residences: 14-day rental rule
| Minimal-rent property | Rental property | Medium-rent property | Heavy-rent property | |
| Rental status | Rented less than 15 days a year | Homeowner stays more than 14 days a year and rents less than 15 days a year | Homeowner stays more than 14 days or 10% of the total days they rent it out | Homeowner stays more than 14 days and less than 10% of the total days they rent it out |
| Do I need to pay tax on my rental income? | No | Yes | Yes | Yes |
| Can I write off business expenses? | No | Yes | Some | Some |
| Tax forms | Schedule A | Schedule E or C | Schedule A, E or C | Schedule A, E or C |
Second home tax deductions
1. Mortgage interest deduction
Mortgage interest is the amount you pay to borrow money from the bank when you buy a home. A mortgage interest deduction is a tax benefit that allows owners of one or two “qualified homes” to write off the interest they paid on their mortgage. But remember that you can only claim the mortgage interest deduction for two homes regardless of how many properties you own.| You can claim this deduction on one or two qualified homes.The mortgage interest deduction limit is $750,000 for individuals and joint filers, and $375,000 for married couples filing separately.Homeowners claiming this deduction must itemize their expenses. Homeowners will need Form 1098-Mortgage Interest Statement from their bank and Schedule A (Form 1040). |
- Personal residence qualifications: Your primary and secondary homes must have sleeping, cooking and toilet facilities. However, the residence itself can be a house, condo, recreational vehicle or boat, so long as you live there part-time.
- Rental and investment properties: You must live in any home that you rent out at least 14 days a year or more than 10% of the time a renter uses the property, whichever duration is lengthier.
- Loan types: You can claim the mortgage interest deduction on any loan where you placed your home as collateral. This means you can get a deduction on first mortgages, second mortgages, home equity loans, home equity lines of credit (HELOC) and reverse mortgages.
- Form 1098-Mortgage Interest Statement: If you pay more than $600 of interest on your mortgage loan, the lender will send you this form.
- Schedule A (Form 1040): To claim the mortgage interest deduction, you will fill out this form with your itemized deductions using the information your lender provides.
2. Property tax deduction
Property tax is an annual fee that local governments charge homeowners based on the value of their property. These taxes usually go toward funding local schools, public safety, roads and infrastructure, parks, library services and more.| You can claim this deduction on as many properties as you own.The property tax deduction limit is $10,000 per tax return for individuals and joint filers, and $5,000 for married couples filing separately. Homeowners must itemize their tax return to claim this deduction. Homeowners must itemize their deductions on Schedule A (Form 1040) to receive this tax break. |
- Qualified homes: You can claim this deduction starting when you take ownership of your home, even if you rent it out to tenants.
- Schedule A (Form 1040): Use this form to itemize your deductions and claim the property tax deduction.
3. Home equity loan interest deductions
Home equity is the home’s current market value less any liens against the property. Once you have equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). If you use the money for home improvements, save all of your home maintenance receipts so you can claim a home equity loan deduction on your taxes.| You can claim this deduction if you use the equity in your home to secure a loan. The tax deduction limit is $750,000 for individuals and joint filers, and $375,000 for married couples filing separately.Homeowners claiming this deduction must itemize their deductions.Homeowners can file using Schedule A (Form 1040). |
- Qualifying residence: You can only apply this deduction to your primary residence or second home.
- Use qualifications: To claim this tax break, you must have used equity from your second home to make substantial renovations or improvements. Alternatively, you can use a loan to buy a new home or property.
- Debt: To deduct loan interest, you must have more equity in your home than debt.
- Form 1098-Mortgage Interest Statement: Your HELOC lender must send you this form by Jan. 31 so you can file your taxes.
- Schedule A (Form 1040): Once you receive the 1098, itemize your deductions on Schedule A and report details like your loan balance and the interest you paid throughout the tax year.
4. Energy efficiency tax breaks
To address rising climate change concerns, the U.S. government is offering tax break incentives to homeowners who make it a priority to reduce their environmental impact and conserve resources. These tax breaks include:- Energy Efficient Home Improvement Credit (EEHI): This $1,200 tax credit applies to any eco-friendly tools or equipment, home renovations and energy audits you buy during the tax year.
- Residential Clean Energy Credit (RCE): This tax credit gives homeowners 30% of the amount they spend on solar, wind, fuel-cell and geothermal-powered equipment for their homes with no set dollar limit.
| You can claim this deduction on your second residence if it isn’t a rental property. The Energy Efficient Home Improvement credit limit is $1,200 per year, and the Residential Clean Energy Credit covers up to 30% of all eco-friendly energy equipment with no dollar limit. Homeowners who claim this deduction must itemize their expenses. Use Form 5965 – Residential Energy Credits to claim your tax benefit for energy efficiency. |
- Qualifying homes: Credits for second homes are limited, but you can get certain covered expenses as long as the taxpayer lives in the residence part-time. Landlords who do not use their secondary residences don’t qualify for this credit.
- EEHI credit uses: Covered purchases for the EEHI credit include doors, windows, insulation, skylights, air sealing systems, central AC, propane, water heaters, natural gas, panelboards, branch circuits, water pumps, home energy audits and more.
- RCE credit uses: Covered purchases for the RCE credit include solar energy equipment, wind energy equipment, geothermal energy equipment, fuel-cell energy equipment and battery storage.
- Form 5965 – Residential Energy Credits: File this form with an itemized list of your purchases to claim the tax credit for your eco-friendly investments in the tax year they’re installed and purchased.
5. Rental expense deduction
Rental expense deductions allow landlords to recoup some of the money they spend on owning, maintaining and repairing their rental properties. The amount you receive will depend on your expenditures and TCJA limitations.| You can only claim this deduction if you use your second home as a rental property.There is no set limit for rental expense deductions. Landlords renting out their second home must submit an itemized list of rental expenses. Homeowners must file Schedule E (Form 1040) and/or Schedule C (Form 1040) to get a rental expense deduction. |
- Qualifying homes: To qualify for this credit, you must be using your second home exclusively as a rental property.
- Covered expenses: Property depreciation, repair costs and operating expenses.
- Schedule E (Form 1040) – Supplemental Income and Loss: Use this form to report your rental income and expenses.
- Schedule C (Form 1040) – Profit or Loss From Business (Sole Proprietorship): Use this form to report your income and expenses if you provide substantial services outside the scope of the signed lease for your tenant’s convenience.
6. Rental depreciation deduction
If you are using your second home exclusively as an investment property, you can collect the rental depreciation deduction. Since the IRS says that rental properties have a limited useful life, you can deduct the cost of your home over 27.5 years.| You can claim this deduction using your second home as a rental property. You can usually deduct 3.636% of your taxable income every year since that is the IRS’ accepted property depreciation rate. You do not need to itemize your expenses to receive this deduction.Homeowners need to file Form 4562 to get this tax break. If you have more than two properties, specify the property under section 179. |
- Qualifying homes: You must own the property, you must be using it to produce income, the IRS must be able to determine the property’s useful life, and it must be fit for habitation for more than one year.
- Limitations: You can’t deduct the entire cost of the property you built, bought or renovated in one year.
- Form 4562 – Depreciation and Amortization: Use this form to claim your depreciation deduction. Don’t forget to expense a specific property under section 179.
Second home tax deductions FAQ
01: How do I know if my home qualifies as a second home for tax purposes?
The IRS considers a property a second home if you reside in the residence at least 14 days of the year or at least 10% of the days you rent it out — whichever time is longer.
02: What expenses don’t qualify for tax deductions on a second home that I use as a personal residence?
Here are a few examples of tax deductions that don’t apply to second homes:
- Personal expenses
- General operating expenses or repairs
- Losses
- Rental expenses (if the property is rented out for less than 14 days)
03: What taxes will I be required to pay on my second home?
Here are some taxes you may be obligated to pay on your second home:
- Property taxes: You must pay property taxes to the local government for any real estate you own in the area.
- Income taxes: You must pay taxes on income generated by renting out your second home.
- Capital gains taxes: If you sell your second residence, you may have to pay capital gains tax because the profit you make from the sale will be treated as income.
You may also be required to pay for local fees or special assessments in some areas, but this won’t impact most homeowners.
04: What is the Tax Cuts and Jobs Act (TCJA)?
The TCJA is a piece of U.S. tax legislation that was passed in 2017. It was written to reform and simplify the existing federal tax code. In essence, it changed tax deductions and credits to stimulate economic growth.
05: How can I get a tax break on the sale of my second home?
In most cases, you can’t get a tax break on the sale of a secondary residence. The capital gains tax break only applies to primary residences, and even if you live at your second home part-time and don’t rent it out, chances are it won’t qualify. The only real way to avoid this is by using your secondary home as a primary residence leading up to the sale of the home. However, you would need to meet all of the IRS criteria. For example, you must have lived in the home for two of the last five years.
Another option is to apply for a 1031 Like-Kind Exchange under IRC Section 1031. This allows you to reinvest your profits from the sale without paying taxes, and you don’t have to pay unless you make a withdrawal.
