Questions you’re asking: What is considered a second home for tax purposes?

Beach houses on a waterfront.

If you’re earning income with your second home, your tax liability can start to get complicated. Here’s what to know.

Maybe you’re already picturing it: a seaside home away from home. And maybe you’re also picturing the income it could generate as a vacation rental when you’re not using it. But before you sign on the dotted line to buy it, you’ll need to know what is considered a second home for tax purposes. Here are a few basics to be aware of.

Tax exposure depends on how much time you spend there

For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.

Assuming your second home is considered a personal residence:

  • You don’t need to report rental income to the IRS if you rent the home for fewer than 15 days per year. The usual mortgage rules apply. You can’t deduct any rental expenses, such as advertising or cleaning costs.
  • In most cases, having a second home categorized as a personal residence means you may be able to deduct some or all of the interest. Interest on your first and second home mortgages up to a combined value of $750,000 (or $1 million if your mortgage started on or before December 15, 2017) may be deductible assuming each mortgage is secured by the home.

Assuming your second home is considered a rental/investment property:

  • You must report rental income to the IRS if you rent your home for more than 15 days per year and your personal use of the property does not exceed 14 days per year or 10% of the number of days that the home was rented.
  • In this case, you can deduct expenses for the rental, including maintenance and utilities.

 What about property taxes?

  • If you own two houses, both of which are strictly for personal use, you owe two sets of property taxes. Currently, under the Tax Cuts and Jobs Act of 2017, there’s a $10,000 deduction limit ($5,000 if married filing separately) for state and local taxes paid, which includes property taxes. This $10,000 maximum could limit your ability to take a deduction for property taxes on your first and second homes.
  • If the second home is considered a rental/investment property, you may have the ability to deduct all or a portion of the property tax without the above $10,000 limitation.

Note: These rules are complicated and there may be other tax implications depending on your specific situation and the location of your home. A financial or tax advisor can help you explore the details.

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.