Can You Deduct Mortgage Interest on a Second Home?

Can You Deduct Mortgage Interest on a Second Home?

January 27, 2022

If you have recently purchased or are considering a secondary residence for use as a short-term rental or personal vacation home, you might be curious about the possible tax breaks and whether or not you can deduct your mortgage interest. As with all tax-related issues, certain rules and regulations govern the process and limit the deductibility. Namely, the amount you can deduct is capped depending on the principal owed on your primary home and the second home, and the qualifications are based on the purpose of the property.

In 2017, The Tax Cuts and Jobs Act (TCJA) decreased the interest you can deduct on your primary and secondary homes to mortgage interest owed on less than $750,000 in principal. In other words, if you are paying a mortgage on a primary home over that amount, you will not qualify to deduct any amount on your secondary property. However, if your primary mortgage is less than $750,000 or nonexistent, you can add the amount owed on both homes together and deduct the mortgage interest paid on principal up to the maximum allowed.

For example, if the mortgage balance on your primary home is $450,000 and your secondary home is $300,000, then you can combine the two and deduct all the interest paid that tax year. However, a primary residence with a mortgage balance of $500,000 and a secondary residence with a balance of $400,000 would result in $900,000 of total principal. At this point, you will only be allowed to deduct 83.3% of the mortgage interest paid that year.

It’s important to note that only two homes qualify for deductions, and both must be utilized for personal use. This means that rental properties and homes over the two residence limit do not qualify for a mortgage deduction.

That said, if the secondary property is a short-term rental—meaning that it is a furnished residence leased in small increments of time, for more than 15 days within a year—it falls into a different set of regulations, as you have what is considered a short-term rental business. Instead of deducting the mortgage interest along with your primary residence, you will report both the income and depreciation of the rental on Schedule E in your tax return. The mortgage interest is considered an expense to run your business, but those expenses are prorated depending on how often you are in the home for personal use. To illustrate, if you use the house for 85 days out of the year and rent it out for the remaining 280, you will only report 76.7% of the interest and depreciation. If these expenses are more than the rental income accrued, it’s considered a passive loss that you will enumerate yearly in your records.

If you have yet to purchase a second home, please peruse our articles on buying a vacation home and the considerations of renting it out. It is important to consult with your professional team of financial and tax advisors regarding such aspects of this decision. Feel free to reach out to us if you have further questions.

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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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