Here is a detailed explanation of how to take advantage of these available deductions*:
If you use the place as a second home—rather than renting it out—interest on the mortgage is deductible within the same limits as the interest on the mortgage on
your first home.
You can write off 100 percent of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the
properties. (That’s a total of $1.1 million of debt, not $1.1 million on each home.) The rules of these tax benefits that apply if you rent out the place are discussed later.
You can deduct property taxes on your second home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of
homes you own.
IF YOU RENT YOUR PROPERTY
Lots of second-home buyers rent out the property part of the year to get others to help pay the bills. Very different tax rules apply depending on the breakdown
between personal and rental use. If you rent the property out for 14 or fewer days during the year, you can pocket the rental income tax-free. Even if you’re charging $5,000 a week, the IRS doesn’t want to hear about it. The house is considered a personal residence, so you deduct mortgage interest and property taxes under the standard rules for a second home.
LONGER RENTALS MEAN DIFFERENT RULES
Rent for more than 14 days and you must report all rental income. You also get to deduct rental expenses, and that gets complicated because you need to allocate costs between the time the property is used for personal purposes, and the time it is rented.
CONSIDER THIS EXAMPLE
If you and your family use a beach house for 30 days during the year and it’s rented for 120 days, 80 percent (120 divided by 150) of your mortgage interest
and property taxes, insurance premiums, utilities and other costs would be rental expenses. The entire amount you pay a property manager would be deductible,
too. And you could claim depreciation deductions based on 80 percent of the value of the house. If a house is worth $200,000 (not counting the value of the
land) and you’re depreciating 80 percent, a full year’s depreciation deduction would be about $5,800.
You can always deduct expenses up to the level of rental income you report. But what if costs exceed what you take in? Whether a loss can shelter other
income depends on two things: how much you use the property yourself and how high your income is.
YOUR USE CAN BE LIMITED
If you use the place more than 14 days, or more than 10 percent of the number of days it is rented—whichever is more—it is considered a personal residence and
the rental loss can’t be deducted. (But because it is a personal residence, the interest that doesn’t count as a rental expense—20 percent in our example—can
be deducted as a personal expense)
*Information provided by Intuit.com. Please see your tax adviser for verification.