What Tax Deductions Can I Claim on a Second Home?

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, homeowners can deduct interest on mortgage debt up to $750,000 for married couples filing jointly, or $375,000 for single filers. These limits apply to the combined mortgage debt on primary and secondary residences. The mortgage must be secured by the home serving as collateral for the loan.

The Tax Cuts and Jobs Act of 2017 reduced the mortgage interest deduction cap from $1 million to $750,000. However, homeowners who purchased their second home before December 15, 2017, may still qualify for the higher $1 million limit.

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 of 2017 introduced a $10,000 cap on the deduction for state and local taxes (SALT), which includes property taxes for both primary and secondary residences. Homeowners with high property tax bills may find their deductions limited. 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 rental property over a 27.5-year period for residential properties, as outlined in the Internal Revenue Code. 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. This includes costs for inspections, repairs, or tenant meetings. The IRS permits deductions for actual expenses, such as airfare, lodging, and meals, or the standard mileage rate for vehicle travel, which in 2023 is 65.5 cents per mile. 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. These fees, covering maintenance of common areas and shared services, can be claimed as rental expenses under IRS rules.

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. For example, if a home office occupies 10% of the property, 10% of related expenses can be deducted. While the regular method may yield a higher deduction, it requires meticulous documentation.

This deduction is available only to self-employed individuals or business operators. Employees working remotely cannot claim it under current tax law. 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.