The IRS allows you to claim the same deductions for your second home you claim for your main home. However, the amount of your deduction and the way in which you report it may be different depending on whether you use it as a second residence or treat it as an investment.
Second Home Mortgage
Most homeowners are eligible to claim an IRS deduction for the interest payments they make each month on their mortgage. The deduction is available for a second residence you own if used for personal purposes. However, the IRS imposes an aggregate mortgage balance limitation for which you can deduct the interest. As of February 2011, only the interest that accrues on a total of $1 million in mortgage balances is eligible for the deduction. For example, if you have a mortgage on your principal residence for $600,000 and one on your second home for $800,000 then all of the interest on your main home is deductible, but only half of the interest accruing on your second mortgage is deductible.
Property Taxes
State and local property tax payments are fully deductible on any number of homes you own. The only requirement is that you are legally responsible for paying the tax. You cannot assume the tax payment for another taxpayer and claim a deduction for it. In addition, the IRS only treats state and local taxes that are imposed on the entire community at a uniform rate and based on the value of the home as a deductible property tax. If the state raises the revenue for other purposes or special projects that don't benefit the community as a whole, then it's not deductible on your federal income tax return.
Rental Properties
If you use the second home as an investment to generate rental income, the property taxes and mortgage interest you pay are deductible. To do so, you must include all rental income in your taxable gross income. In most cases, there is no limitation on the amount of property taxes you can deduct; however, in order to deduct the mortgage interest, your rental income must exceed all deductible expenses that relate to the rental property, other than mortgage interest. Essentially, the deduction for interest cannot cause you to report a negative number or a loss on your tax return. If you are unable to deduct the interest in the year you pay it, the IRS allows you to carry it forward to another tax year you have sufficient income.
Claiming Deductions
To claim a property tax and mortgage interest deduction on your second home, you must be eligible to itemize your deductions. Eligibility requires that your total deductible expenses for the year exceed the standard deduction amount for your filing status. If you claim a deduction for mortgage interest on a rental property, you must still report it on the Schedule A attachment to your tax return, but must also prepare IRS Form 4952.
Tags: mortgage interest, second home, your second, claim deduction, rental income, your second home
