Deducting Mortgage Interest on a Vacation Home

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Question: I’m about to buy a lake house as a second home. I plan to go there a few times a month but not live there full-time, and I don’t plan to rent it out. Is the mortgage interest tax-deductible?

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Answer:

Yes. As long as you don’t rent out a second home for more than 14 days each year, you can deduct the mortgage interest you pay on it. But your deduction is capped at the interest you pay on up to $1 million of debt on your first and second homes combined. You can also deduct property taxes on your first and second home. All of these deductions are only available if you itemize.

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If you change your mind about renting the lake house to others, you’ll still be able to deduct the mortgage interest as long as you don’t lease it out for more than two weeks a year. And any rental income you receive will be tax-free, too, if you stay within the two-week limit.

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If you rent out the house for longer than that, you’ll have to report the rental income to the IRS. But you can still deduct some of the mortgage interest and rental expenses, such as insurance and utilities, for the portion of the time that you rent out the house. Calculating the deduction gets complicated because you’ll need to determine how much of those costs should be allocated to when you were leasing out the house and when you were personally using it.

For more information about deducting mortgage interest on second homes and the rules for deducting rental expenses, see Tax Planning for Owning a Second Home and Buying a Vacation Home. Also see IRS Publication 530, Tax Information for Homeowners.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.