Second Home Taxes
A second home is a place with sleeping, cooking, and toilet facilities. Second homes include:
- Mobile homes
- House trailers
- House boats
If you own more than two homes, you must choose which home other than your main home to treat as the second home. However, you don’t necessarily have to choose the same home as your second home each year. To learn more, see Publication 936: Home Mortgage Interest Deduction at www.irs.gov.
You might take out a mortgage to buy, construct, or substantially improve a second home. If so, 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 (FMV) of your home.
- The mortgages on your main home and your second home are more than:
- $500,000 if filing single
- $1 million if married filing jointly
These limits don’t apply to mortgages taken out before Oct. 14, 1987. This is called grandfathered debt. However, grandfathered debt reduces these limits.
You might take out a home-equity loan or line of credit on your second home. If so, the interest is usually fully deductible. This applies unless either of these is true:
- The mortgage is more than the FMV of the home. This is without mortgages and including grandfathered debt.
- The home-equity debt on your main home and second home is more than:
- $50,000 if filing single
- $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. You might refinance or sell the home before you pay off the mortgage. If so, you can deduct points in the year of sale or refinance points you didn’t previously deduct.
Renting your second home
You don’t have to report rental income if both of these apply:
- You use the home as a residence.
- You rent it for fewer than 15 days in the tax year.
It’s considered a residence if you or a family member uses the home for personal use for more than the greater of these:
- 14 days
- 10% of the number of days you rent the home at fair rental value
You can’t deduct expenses you can attribute to the rental. However, 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. You can deduct other rental expenses, including depreciation. However, you can only deduct 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. Then, they’ll again be 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 one year
- Short-term capital gain — if you owned it one 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. So, you can deduct the loss. The part of the gain you can attribute to depreciation is taxed at a maximum rate of 28%. If you used the home for personal purposes and rented it, you must treat the sale as part personal, part business.
You can exclude up to $250,000 of the gain if both of these are true:
- The second home was your main home for at least two years in the last five years.
- The five-year period ended on the date of sale.
If you’re married filing jointly, you can exclude up to $500,000. However, both of you must have used the home as your main home for the required period. You can’t claim the exclusion if both of these apply:
- You sold another home within the two-year period ending on the date of sale.
- You claimed the exclusion for that sale.
You might not meet the two-year ownership or use requirement. If so, 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 these situations, the maximum exclusion will be reduced. You can’t exclude any gain you can attribute to depreciation that you claimed after May 6, 1997.
The gain you can exclude might be limited if both of these apply:
- You sell a second home.
- You use the home other than as your main home (nonqualified use) at any time after 2008.
For this purpose, nonqualified use doesn’t include:
- Any period before Jan. 1, 2009
- Any period in the five-year period that’s after the last period of use as a main home
- A period of temporary absence for up to two years for these reasons:
- Unforeseen circumstances
- Any period of 10 years or less when you or your spouse was serving on qualified official extended duty
To learn more, see these tax tips:
- Home Equity Self-Employment Deductions
- Year-End Tax Tips
What are the differences between real estate taxes and property taxes? Learn more from the tax experts at H&R Block.
Learn more about the rules of reporting rental income and get tax answers at H&R Block.
Learn more about capital gains tax on real estate with advice from the tax experts at H&R Block.
Learn more about reporting rental property income for your self-managed property with help from the tax experts at H&R Block.