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Many people dream of owning multiple homes, either as a vacation resource or investment opportunity. Of course, buying a second home means carrying a second mortgage, raising your expenses considerably. But there’s a big difference in your tax liability if you’re buying a second home with the intention of renting it out as opposed to using it as a second residence.

The Trump-era Tax Cuts and Jobs Act (TCJA) changed how tax breaks work for second residences, giving homeowners fewer tax benefits on second residences. However, you can still significantly lower the cost of owning a second home by knowing the right tax deductions to claim.

Second home vs. investment property

When reporting your taxes to the IRS, it’s important to understand how they will view your second home from a tax perspective. Your property is either a second home, an investment property, or a mixed-use property, and the depending on which it is, you will face different tax consequences, including what deductions you qualify for.

A second home is occupied by the owner at least 14 days out of the year and is rented out no more than 14 days out of the year. Second homes consist of one unit that isn't subject to time share requirements.

An investment property is occupied by the owner no more than 14 days of the year and rented out more than 14 days out of the year. Investment properties can be more than one unit, like a duplex or multi-family home.

A mixed-use property is occupied by the owner for more than 14 days out of the year and rented out more than 14 days out of the year.

Related: Should you sell or rent your house?

How are second homes taxed differently than primary residences?

The biggest taxation difference between primary and secondary residences is just how complicated it all gets. As noted above, the IRS views second homes in one of three ways, each of which has different taxation rules and tax deductions available.

When you have a second home, you must keep meticulous records of how that home is used, especially if you’re renting it out or doing renovations. When it comes time to file your taxes, you’ll need to consult with a tax professional to figure out exactly what you can and can’t claim as deductions.

→ Read about buying�� a second down without a down payment

What tax deductions are available for second homes?

Here's what you can usually deduct on your taxes when you have a second home:

• Interest on the mortgage or a home equity loan
• Property taxes
• Losses and capital gains

Mortgage interest deduction

Provided your second home was purchased after December 15, 2017, you occupied it for more than 14 days of the year, and it isn’t a rental or business property, then you may deduct mortgage interest on this home just as you would with your primary home.

Both single filers and married couples filing jointly may deduct up to a total of $750,000 of mortgage interest across all properties owned.�� When you’re filing, you’ll need to provide Form 1098 and itemize your deductions using Form 1040, Schedule A.

In 2025, the Tax Cuts and Jobs Act will expire, at which point it’s expected that the maximum deductible amount will increase to $1,000,000 unless new legislation is passed. (You may deduct up to $1,000,000 of mortgage interest for properties purchased before December 15, 2017.)

Property tax deduction

You may deduct property taxes on every property you own, with a maximum deduction of $10,000 if single or married filing jointly and $5,000 for married filing separately. Unfortunately, as of 2018, the total of all state and local income taxes (SALT) is limited to $10,000 per tax return so you’ll likely hit the maximum amount from your first home’s property taxes.

Home equity loan interest deduction

Want to make improvements to your second home? If you take out a home equity loan or a home equity line of credit (HELOC) and use the money on home improvements, you may deduct the interest paid on that loan. Just make sure you save all of your receipts!

Passive losses

Generally, real estate losses are considered “passive losses” which are not deductible. There’s an exception to that rule, however.

If your Adjusted Gross Income (AGI) is less than $100,000, you may deduct up to $25,000 of real estate losses each year to offset the rest of your income. If your AGI is between $100,000 and $150,000, you forfeit that $25,000 allowance. Still, the passive losses you can’t deduct may store up over time and used to offset your taxable profit when you sell the home later.

Capital gains tax

The Home Sale Tax Exclusion allows single home sellers to take up to $250,000 and married home seller to take up to $500,000 in profit tax-free. The rule only applies to primary residences, though. But if you’re selling the vacation house, you can make it your primary residence in the IRS’s eyes before you sell.

You must own that home for at least five years and use it as a primary residence for at least two of those five years. That makes this a loophole that’s most palatable for retirees who are spending a significant amount of time in a vacation home anyway.

You may use some of the same tax deductions on a second home as a primary residence. However, they come with additional stipulations and are more heavily regulated if you’re using the second home as a rental or investment property. But as we’ve outlined above, even deductions you couldn’t normally take have exceptions for savvy landlords or short-term renters. To minimize your tax burden on your second home, it’s wise to consult with a tax professional before you plan to rent your second home for more than 14 days of the year.

→ Learn more about avoiding capital gains tax on a home sale

Tax benefits for rental properties

If you rent out your second home for part of or all of the year, things get complicated. You might still be able to deduct mortgage interest, but it’s not guaranteed.

If the IRS views the second home as an investment property, you may not claim the mortgage interest deduction, however you could deduct mortgage interest as a business expense to lower the taxable income you accrued through rent.

The IRS will categorize a rental property as “use often, rent rarely,” “use rarely, rent often,” or “use some, rent some.” As banal as they sound, these are official — and important — distinctions.

Here are 10 rental property deductions for landlords.

Rent rarely

The “use often, rent rarely” category is covered above — these are homes that you rent for no more than 14 days during the tax year. As such, the home is considered a personal residence and you may deduct mortgage interest and property taxes as you would on any home. (You just can’t deduct rental-related expenses like utilities and advertising.)

Use rarely, rent often

If you rent out a home for more than 14 days per year, your home is considered a business. Like a business, you can deduct rental expenses like mortgage interest, property taxes, insurance costs, property manager fees, utilities, and property depreciation. You must report all of your rental income as business income rather than personal, so the mortgage interest rate deduction won’t apply to your personal tax return. This also means you’ll have to meticulously divide your property-related expenses between personal and rental use.

Use some, rent some

If you both rent the property for more than 14 days per year and use it as a residence for the greater of 14 days or 10% of the total days the property was rented, it qualifies as a personal residence. In these instances, you can deduct mortgage interest and property taxes like normal.

It’s important to note here that days you spent living in the home while performing repairs or maintenance don’t count towards the 14 occupation days. As such, it pays to invest in fixing up the property since you could both write off the maintenance expenses on your business return and still claim the mortgage interest deduction on your personal return.

→ Learn about what home improvements are tax deductible