Is Second Home Mortgage Interest Tax-Deductible?

The mortgage interest deduction is available for second homes.

The mortgage interest deduction is available to taxpayers who purchase a second home. However, the Internal Revenue Service requires second-homebuyers to meet specific requirements before a deduction can be taken. A clear understanding of the rules prior to filing a tax return is imperative to ensure the full tax benefit is utilized.

Qualified Home

Eligibility for the mortgage interest deduction requires the second home to be a qualified home. A qualified home is a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has cooking, sleeping and toilet facilities. Taxpayers are limited to two qualified homes per tax year. Therefore, if you own more than two properties financed by a mortgage, only one property in addition to your main home can be deemed a qualified home. Residences designated as qualified homes can be changed each year.

Secured Mortgage

To deduct mortgage interest on loans used to purchase a second home, the entire principal balance must be secured by a "qualified home." This requirement will be met if the mortgage document provides that the second home will satisfy the debt in the event of default.

Rental Use

If a second home is partially used for rental purposes during the year, the mortgage interest deduction will be disallowed if there is insufficient personal use of the home by the taxpayer and will be treated as rental property. In order to preserve the deduction, the second home must be used for more than 14 days, or more than 10 percent of the number of days that the home is rented at fair value during the year, whichever is longer.

Home Office

Second homes that are partially used for business purposes, such as a home office, will reduce the amount of deductible mortgage interest available. Taxpayers must determine the percentage of the home used for non-business purposes based on the ratio of square footage of the home used for non-business to the home's total square footage. This percentage is multiplied by the total annual interest payments to determine the amount of mortgage interest that can be taken as an itemized deduction.

Limitations

To deduct the full amount of mortgage interest paid on a second home loan, the aggregate principal mortgage balance for both homes may not exceed $1 million. If principal balances exceed this amount, interest accrued on the excess will not be deductible. Additionally, interest accrued on any portion of the loan balance that was used for purposes other than to purchase, construct or improve the second home will be ineligible for a deduction.

Points

Points that are paid to acquire a mortgage on a second home are deemed prepaid interest by the IRS and qualify for the mortgage interest deduction. However, if the second home replaces the first as the main home of the taxpayer, the points can be fully deductible in the year paid. In situations where the second home is purchased for vacation use, points must be deducted over the life of the mortgage.

References

• IRS Publication 936: Home Mortgage Interest Deduction
• IRS Publication 587: Business Use of Your Home
• IRS Publication 530: Tax Information for Homeowners