Tax Breaks for Second Homeowners

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Tax Breaks for Second-Home Owners

Mortgage interest. If your getaway is a second home (not a business property), interest is deductible just as it is for your primary residence — you may write off 100% of the interest on up to $1.1 million of combined debt on the two houses.

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Rental income. You can rent your cabin for 14 or fewer days per year and pocket the cash tax-free. You’re eligible for the exclusion even if you charge tourists thousands of dollars to sleep in your beds. Once you exceed 14 days, though, you must report all rental income.

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Taxes on profits. The break that allows homeowners to take up to $250,000 of profit from a home sale tax-free ($500,000 for married couples) is restricted to the sale of a primary residence. But you can extend the tax break to cover part of the profit on a second home if you convert it to your primary residence at least two years before you sell. The portion of the profit that is tax-free is based on the ratio of time after 2008 that the house was a second home to the total time you owned it. Say you buy a vacation home this year, use it as a retreat for five years, and then move in and make it your principal residence. If you sell ten years later, two-thirds of the profit would be tax-free.