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.
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.
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.
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