Owning a second home can offer both personal enjoyment and financial advantages, but it also introduces complexities in tax management. Understanding tax deductions is crucial for maximizing returns and staying compliant with IRS regulations.
Mortgage Interest
Mortgage interest is a key tax consideration for second homes. Under U.S. tax law, you can generally deduct interest on up to $750,000 of home acquisition debt in total across your primary and second home ($375,000 if married filing separately). Homeowners with acquisition debt incurred before December 16, 2017, may qualify for the prior $1,000,000 limit (with a binding-contract exception for certain purchases closed by April 1, 2018). 1Internal Revenue Service. Publication 936 Home Mortgage Interest Deduction
The mortgage must be secured by the home serving as collateral for the loan.
To claim the deduction, taxpayers must itemize deductions on Schedule A of their tax return. This involves comparing the standard deduction with total itemized deductions to determine the most beneficial option. Accurate records of mortgage interest payments, typically provided on Form 1098, are essential.
Property Taxes
Property taxes on a second home can significantly affect finances. These taxes, determined by local governments based on property value, are deductible on federal income tax returns for those who itemize deductions.
The Tax Cuts and Jobs Act introduced a $10,000 cap on the combined deduction for state and local taxes (SALT), which includes property taxes for both primary and secondary residences. 2Internal Revenue Service. Topic No. 503 Deductible Taxes
Prepaying property taxes within the same tax year can sometimes help maximize deductions.
Regularly reviewing property assessments is advisable to avoid overpayments. If an assessment seems inflated, appealing the valuation with the local tax authority could reduce tax liability.
Rental-Related Deductions
Renting out a second home opens opportunities for tax deductions that offset rental income. These deductions require careful documentation and adherence to IRS rules.
Depreciation
Depreciation allows property owners to deduct the cost of a residential rental building over 27.5 years under MACRS (straight-line with a mid-month convention). 3Internal Revenue Service. Instructions for Form 4562
The deduction is calculated by dividing the property’s basis—generally the purchase price plus capital improvements—by the recovery period. For example, a property with a $275,000 basis would result in an annual depreciation deduction of $10,000. Land value is excluded from this calculation. Accurate records are necessary to ensure compliance.
Maintenance and Repairs
Expenses for maintaining and repairing a rental property are deductible as ordinary and necessary business expenses. Routine upkeep, such as fixing leaks or painting, qualifies as a deductible expense, while capital improvements, like replacing a roof, must be depreciated over time. Keeping detailed records and receipts is critical to substantiate these deductions during an IRS audit.
Travel Expenses
Travel expenses related to managing, maintaining, or collecting rental income from a second home are deductible when the primary purpose of the trip is the rental activity. The IRS permits deductions for actual expenses (such as airfare, lodging, and meals subject to applicable limits) or the standard mileage rate for vehicle travel, which for tax year 2025 is 70.0 cents per mile for business use. 4Internal Revenue Service. IRS Increases the Standard Mileage Rate for Business Use in 2025
Documenting travel dates, purposes, and related expenses is essential. Travel must be directly related to the rental activity to qualify for deduction.
HOA or Condo Fees
For second homes in homeowners associations (HOAs) or condominium complexes, HOA or condo fees may be deductible if the property is used as a rental. Specifically, for a rented condominium, dues or assessments paid for maintenance of common elements are deductible rental expenses. 5Internal Revenue Service. Publication 527 Residential Rental Property
If the property is used for both personal and rental purposes, the fees must be prorated based on the rental period. Exclusively personal use of the property disqualifies these fees from being deductible. Accurate records are necessary for proper allocation.
Home Office
A home office deduction can reduce taxable income for individuals using part of their second home exclusively for business purposes. This includes allocating a portion of expenses, such as utilities, insurance, and depreciation, to the business. The workspace must be used regularly and exclusively for business and serve as the principal place of business or a location to meet clients.
The deduction can be calculated using the simplified method, which allows $5 per square foot for up to 300 square feet, or the regular method, which involves calculating actual expenses based on the office’s percentage of the property’s square footage. 6Internal Revenue Service. Simplified Option for Home Office Deduction
This deduction is available only to self-employed individuals or business operators; employees cannot claim a deduction for business use of the home for tax years 2018 through 2025. 7Internal Revenue Service. Instructions for Form 8829
Ensuring the home office meets IRS requirements is critical to avoid penalties. Proper documentation, such as photographs and records of business activities, is recommended to substantiate the deduction.