Second-Home Deductions

Your cabin by the lake may provide you with more than rest and relaxation—it could also be a valuable source of deductions. For tax purposes, a qualified second home must have a place to sleep, a toilet, and cooking facilities, whether it be a condominium, recreational vehicle, boat, etc.

You may be able to deduct interest on a loan for a second home, provided your primary and secondary mortgages, including funds used to improve the homes, do not total more than $1 million. If you rent out the second home, you must use it personally for more than 14 days or for more than 10% of the rental days, whichever is greater, for it to qualify as a personal residence. In addition to mortgage interest, you may be able to deduct property taxes and prorated monthly portions of your points paid over the life of the loan.

If you rent the home for more than 14 days a year and it qualifies as a personal residence, you can also deduct the appropriate portion of upkeep, insurance, utilities, and similar costs to offset rental income. The property may be depreciated, which will help reduce your rental income without expending cash. As long as you use the place yourself for less than 14 days or 10% of the rental days, it is considered rental property, and you can claim a rental loss (subject to certain limitations).

Finally, you can rent your secondary or primary home for less than 15 days without reporting the income. Rental expenses, however, are not deductible.