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The mortgage interest deduction is a popular tax break that allows homeowners to write off the home loan interest they pay each year.
But what about considering the deduction for a second home? What qualifies for the mortgage interest deduction? And more importantly, can you deduct mortgage interest on a second home? The short answer is yes, but you should be aware of a few caveats and considerations first.
This article will help you understand the why and how behind deducting mortgage interest on a second home.
Deducting Interest on a Second Home, Explained
You can deduct mortgage interest on a second home, but there are some requirements to capitalize on this tax benefit. You first have to determine if your property is considered a second home or an investment property.
What is considered a second home?
The second-home designation is important. If your home would be classified as a rental property, you could still deduct the mortgage interest you pay on that property, but the rules and requirements are different.
The Internal Revenue Service (IRS) has set guidelines for when a home is considered a second home instead of a rental property. For the property to be considered a second home, it can’t be rented out more than 14 days during the year. Once you rent it out for the 15th night, it becomes a rental property in the eyes of the IRS.
What is the mortgage interest tax deduction limit for a second home?
The limit on deductions is shared between up to two personal residences. A personal residence is any home you own that is not classified as an investment property.
According to the IRS, joint filers have a limit of $750,000 and single filers $375,000 for personal residences. However, if your mortgage originated before December 16, 2017, your limits are $1,000,000 if filing as a couple and $500,000 if you are a single filer.
This means if you’re a single filer who bought a primary residence before 2020, and claimed $200,000 in mortgage interest on your primary residence, you’d be able to claim an additional $175,000 in interest from a second home – meeting the IRS limit of $375,000 in mortgage interest deductions.
Standard deduction vs. Itemized deduction
When filing taxes, many people will take what is referred to as the standard deduction. This is an amount of money the IRS allows you to deduct from your income without having to itemize each deduction. For 2023, the standard deduction is $27,700 for joint filers and $13,850 for single filers.
Taking the mortgage interest deduction on a personal residence requires itemizing your deductions, which means completing Schedule A of Form 1040. Schedule A allows you to list all of the individual deductions you are taking.
You would generally only choose to itemize if your outlined deductions will exceed the standard deduction. A joint filer would need more than $27,700 in deductions to benefit from itemization, and a single filer would need more than $13,850.
If your deductions do not exceed those thresholds, confirm with your tax advisor. You’ll probably be better off skipping itemization and opting for the standard deduction.
Deducting Mortgage Interest on a Rental Property
It’s common for people to wonder how the mortgage interest deduction works on a rental property. If you own a rental property, you can still deduct the mortgage interest you pay on that property. But the rules and requirements are different.
Let’s revisit the definition of a rental property. A second home is considered an investment property if you rent it out for more than 14 days in a year. It doesn’t matter how much rental income you earn in this period. In fact, you don’t have to claim rental income if you’re renting the property for 14 days or less. The income is tax free regardless of the amount.
You can rent a second home out for 14 nights, but once you rent it out for that 15th night, it becomes a rental property to the IRS.
This isn’t necessarily a bad thing. Rental property tax deduction opportunities are more prevalent than tax deductions on your personal real estate.
When a home is classified as a rental property, you can deduct all operating expenses associated with that property on your tax return. This includes mortgage interest, property taxes, insurance, utilities, maintenance and repairs. There is no limit to the mortgage interest deduction for rental properties.
Other Tax Advantages for Second Homeowners
There are a couple of other tax advantages second homeowners may find useful.
- Property taxes: You can deduct up to $10,000 of state and local property taxes paid in a calendar year. This can be a combination of your primary residence and any number of second homes; you aren’t limited to one as with the mortgage interest deduction.
- Capital gains tax: You may be subject to capital gains tax on any profit you make when you sell a property. However, there are several exclusions and deductions you can take to lower the amount of tax you owe. For example, if you’ve owned the property for less than one year, capital gains are taxed at your nominal tax rate. If you’ve owned it for more than a year, you’ll pay long-term capital gains of between 0% – 20%, depending on how much you earn from the sale.
Fewer Deductions, More Enjoyment
While there are several tax advantages to owning a second home, the rules are different for personal residences and rental properties. You’ll want to understand these nuances before purchasing a second home so you can maximize your tax advantages.
If you’re thinking of buying a second home, you’ll probably discover there aren’t quite as many tax advantages with a second home compared to an investment property. This makes sense though, as the purpose of an investment property is the financial opportunity. Whereas, a second home is often used for personal enjoyment.
With some thoughtful planning, you can make the most of the available deductions while also maximizing your enjoyment of the second home.
The Short Version
- The mortgage interest deduction allows homeowners to write off the interest they pay on their home loans each year, up to $750,000 for couples and $375,000 for single filers
- You aren't limited to deducting the interest on the first home. You can deduct interest paid on a second home up to the annual limit
- If itemizing, a single filer would need to have over $12,950 in deductions to benefit from the mortgage interest deduction over using the standard deduction
Internal Revenue Service. “Publication 936 (2021) Home Mortgage Interest Deduction.” Retrieved May 2022 from https://www.irs.gov/publications/p936#en_US_2021_publink1000229905
Internal Revenue Service. “IRS provides tax inflation adjustments for tax year 2023.” Retrieved January 2023 from https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
Internal Revenue Service. “About Schedule A (Form 1040), Itemized Deductions.” Retrieved May 2022 from https://www.irs.gov/forms-pubs/about-schedule-a-form-1040
Internal Revenue Service. “Renting Your Vacation Home.” Retrieved May 2022 from https://www.youtube.com/watch?v=oEMKRVBTBJ0&ab_channel=IRSvideos
Internal Revenue Service. “Topic No. 503 Deductible Taxes.” Retrieved May 2022 from https://www.irs.gov/taxtopics/tc503
Internal Revenue Service. “Topic No. 409 Capital Gains and Losses.” Retrieved May 2022 from https://www.irs.gov/taxtopics/tc409