Tax Tips & Calculators

A second home can be a house, condominium, cooperative, mobile home, house trailer or boat that has sleeping, cooking and toilet facilities. For example, an RV can qualify as a second home. If you own more than 2 homes, you must choose which home other than your main home to treat as the second home. However, you don't have to choose the same home each year.

A second home is a place with sleeping, cooking, and toilet facilities. Second homes include:

• Houses
• Condominiums
• Cooperatives
• Mobile homes
• House trailers
• Recreational vehicles
• House boats

If you own more than 2 homes, you must choose which home other than your main home to treat as the second home. However, you don't have to choose the same home as your second home each year.

Second-Home Deductions

If you take out a mortgage to buy, construct or substantially improve a second home, you can deduct the interest if you itemize deductions. Your deduction might be limited if either of these is true:

• Your mortgage is more than the fair market value of your home.
• The mortgages on your main home and your second home are more than $500,000 – $1 million if married filing separately.

These limits don't apply to mortgages taken out before Oct. 14, 1987 – called grandfathered debt. However, grandfathered debt reduces the $500,000 and $1 million limits.

If you take out a home equity loan or line of credit on your second home, the interest is usually fully deductible. This applies unless either of these is true:

• The mortgage is more than the fair market value of the home minus mortgages, including grandfathered debt.
• The home-equity debt on your main home and second home is more than $50,000 – $100,000 if married filing jointly.

If you itemize deductions, you can deduct real-estate taxes and points you pay over the life of a mortgage to buy a second home. If you refinance or sell the home before you pay off the mortgage, you can deduct points in the year of sale or refinance points you didn't previously deduct.

Renting Your Second Home

If you use the home as a residence and rent it for fewer than 15 days during the year, you don't have to report the rental income. It's considered a residence if you or a family member uses the home for personal purposes for more than the greater of:

• 14 days
• 10% of the number of days you rent the home at fair rental value

You can't deduct expenses attributable to the rental, but you can deduct interest and taxes if you itemize your deductions.

If you use the home as a residence and rent it for 15 days or more, report the rental income. You can deduct your interest and taxes as described above. However you can deduct other rental expenses – including depreciation – only up to the amount of the income minus the deductions for interest and taxes. Carry over any rental expenses not deductible under this rule to the next year, when they're again subject to this limit.

If you don't use the home as a residence, the above rules don't apply. Report your income and expenses the same as you do for other rental property.

Selling Your Second Home

If you sell your second home, the gain will be taxed as a:

• Long-term capital gain if you owned it for more than 1 year
• Short-term capital gain if you owned it 1 year or less

You can't deduct a loss on the sale.

If you rented out your second home for profit, gain usually is taxed as capital gain, and you can deduct the loss. The part of the gain attributable to depreciation is taxed at a maximum rate of 25%. If you used the home for personal purposes and rented it, you must treat the sale as part personal, part business.

If the second home was your main home for at least 2 years during the 5-year period ending on the date of sale, you can exclude up to $250,000 of the gain. If married filing jointly, you can exclude up to $500,000 if you both used the home as your main home for the required period. You can't claim the exclusion if you sold another home within the 2-year period ending on the date of sale and claimed the exclusion for that sale.

If you don't meet the 2-year ownership or use requirement, you can claim the exclusion only if you sell the home for these reasons:

• Change in health
• Change in place of employment
• An unforeseen circumstance

In the above situations, the maximum exclusion will be reduced. You can't exclude any gain attributable to depreciation you claimed after May 6, 1997.

If you sell a second home and use it other than as your main home (nonqualified use) at any time after 2008, the gain eligible for the exclusion might be limited. For this purpose, nonqualified use doesn't include:

• Any period before Jan. 1, 2009
• Any period during the 5-year period that's after the last period of use as a main home
• A period of temporary absence of up to 2 years for reasons of health, employment, and unforeseen circumstances
• Any period of 10 years or less when you or your spouse was serving on qualified official extended duty