How to avoid tax on a second home: Learn rules and tips

A second home — whether it’s a vacation getaway, a rental property, or your future retirement home — can be a great investment. 

But second homes also add new responsibilities, including maintenance and tax costs. In fact, tax bills on second homescan exceed the rates you're accustomed to paying on a primary residence, undermining the value of the investment. 

Understanding these tax implications before you buy can help you save money and get more out of owning two homes.

Tax implications and deductions of owning two homes

Owning more than one property means juggling different types of tax responsibilities. Primary residences can offer tax exemptions and deductions that investment properties and second homes can't always offer.

On the other hand, people who go all in and buy investment properties to earn income from rent can claim tax deductionsthat ordinary homeowners won't get.

Where your second home falls on this spectrum will help shape your tax liabilities on all your real estate.

...in as little as 3 minutes – no credit impact

Property taxes

First, the bad news: Unlike owner-occupied homes, second homes are usually exposed to the full property tax rates levied by the local government. The more valuable the home, the higher the annual property tax bill.

The good news: You can typically deduct these taxes and lower your taxable income with the IRS and with your state income tax authority.

The IRS caps this deduction at $10,000 for joint filers and $5,000 if married filing separately. 

Capital gains tax

When you sell a second home, you may face capital gains taxes on the profit. Unlike a primary residence, you usually can’t exclude the first $250,000 ($500,000 for married couples) of gain.

But here are ways to minimize this burden, such as converting the vacation home into your primary residence before selling. Be sure to follow IRS and state rules for length of occupancy before selling.

Deducting mortgage interest

You can deduct mortgage interest on a second home, provided the loan amount, when combined with your primary residence mortgage balance, does not exceed $750,000 ($375,000 if married filing separately). 

This rule applies to loans taken after December 15, 2017. Older loans may qualify under the $1 million limit.

This won't work if you rent out the vacation home for extra income full time.

Other costs and improvements

Certain expenses, like insurance or maintenance, generally won't be tax deductible unless the property is classified as a rental.

However, improvements that increase the home’s value may reduce taxable gains later. Financing these projects with tools like Better’s one-day HELOC can also help make upgrades more tax-efficient.

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What's the difference between a personal residence and a rental property?

The IRS treats many second homes like rental or investment properties, even if the owner uses it as a personal vacation getaway or a future retirement home.

How your second home gets categorized depends a lot on the 14-day/10% rule:

• If you rent out the property for 14 days or fewer per year, the IRS treats it as a personal residence, and you don’t have to report that rental income.
• If you rent out the home for more than 14 days a year, and personal use is less than 10% of total rental days, it’s considered a rental property.

This matters because the IRS classification determines which deductions you can claim.

Tax rules for a personal residence

If your second home is considered a personal residence, you can deduct mortgage interest and property taxes within annual IRS limits. You can’t deduct maintenance, utilities, or depreciation.

Tax rules for a rental/investment property

Rental properties allow more deductions. Beyond mortgage interest and property taxes, you can also deduct expenses like insurance, maintenance, management fees, and even depreciation.

On the flip side, rental income must be reported, too, increasing your annual income tax bill. These deductions can offset this liability.

How to minimize taxes on a second home

There are several legal ways to reduce your tax liability on a second home:

Rent out your second home

Renting out the home for more than 14 days allows you to deduct rental-related expenses. If you keep personal use low, you maximize the tax benefits of being classified as a rental.

Convert second home into a primary residence

Living in your second home for at least two years could qualify you for the primary residence exclusion on capital gains when you sell — up to $250,000 ($500,000 for couples).

There's a movement to eliminate capital gains altogether on primary residences, but for now these limits still apply.

Use a 1031 exchange for true investments

If your second home is classified as an investment property, you may be able to defer capital gains taxes by using a 1031 exchange, also known as a like-kind exchange. Essentially, this trades the second home for another qualifying investment property.

Keep good records

Keeping detailed records of rental days, rental amounts, property improvements, and expenses will make life easier later. Accurate records helps you claim deductions and withstand IRS scrutiny if necessary.

Second home tax implication FAQs

Is mortgage interest on a foreign second home tax-deductible?

Yes, you can deduct mortgage interest on a foreign second home, subject to the same $750,000 limit. Additional reporting may apply depending on the country.

Can you defer capital gains by purchasing another home?

No, simply buying another home does not allow you to defer capital gains. The only way to defer is through a 1031 exchange, and the property must qualify as an investment property.

How many second homes can you have?

You can own multiple homes, but the IRS only allows mortgage interest deductions for one primary residence and one second home at a time. Additional homes can't claim this deduction.

Can I leverage my first home to buy a second home?

Yes. Home equity loans and home equity lines of credit exist specifically for this purpose. They use the paid-off portion of your primary residence to secure more credit which can be used as a down payment on the second home.

A digital preapproval can show your second home buying budget

To get a handle on your unique tax situation before buying a second home, it's best to consult a tax professional.

When you're ready to jump into homeownership for the second time, you can get a quick estimate on mortgage costs with a preapproval from Better.

Better's digital preapproval can show results within three minutes without impacting your credit score.

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