Want a Vacation Home? Three Ways the Math Can Work
You might not see much in the way of tax breaks on a vacation home, but these three tax considerations could make a difference.
The weather is warming up. Your retired friends are coming back from Florida. Not only did they avoid the cold, but they also got a tax break. Right? In the context of this article, it’s important to differentiate between state income taxes and the tax considerations of owning a vacation property. This article is all about the latter. A future column will address the former.
Before we get into the meat of it, I’ll break the bad news: It is almost never a good financial move to buy a second home. With the advent of Vrbo, Airbnb and similar services, it’s almost always cheaper to rent than it is to buy. Remember, for purposes of this article, we are not factoring in state income taxes that could be saved if you buy a second home and meet residency requirements in a tax-friendly state. That said, below are three ways you can make the math more favorable.
1. Rent out your vacation home for two weeks or less.
By definition, a vacation home is not a rental or investment property. Rentals are reported on Schedule E and have completely different rules than a vacation home. However, the IRS allows you to rent your home for 14 days or less without having to report that income. This can be especially impactful for homes in popular tourist destinations and has been coined the “Masters exemption” because of how much tax-free income is earned by those with homes in Augusta, Ga., during Masters week. Think beach towns during Memorial Day and Labor Day. Think college campuses during homecoming and graduation weekend.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
2. Take advantage of the mortgage interest deduction.
Yes, you can deduct mortgage interest on a second home. However, there are a few things to be aware of. This benefits you only if you itemize deductions. On your form 1040, Schedule A reports itemized deductions. You add up all your deductions, and if that number is higher than the standard deduction, you itemize. The standard deduction was doubled as part of the Tax Cuts and Jobs Act (TCJA), and many of the deductions were capped. According to the Tax Foundation, only about one in 10 taxpayers itemizes. To see a benefit from your vacation property, you must be in that 10%.
The TCJA also reduced the amount of mortgage debt that you can use in this calculation. You cannot write off interest on aggregate balances of more than $750,000. Therefore, if you already have a $500,000 mortgage, only $250,000 of debt on a second mortgage property will give you a tax break.
3. Take advantage of the property tax deduction.
Property tax deductions can also be found on Schedule A. This is very similar to the rule above because you must itemize deductions to see any benefit. Also similar is that there is a cap on the deduction because of the TCJA. This is the dreaded “SALT cap.” You are allowed to deduct a maximum of $10,000 in state income taxes and property taxes paid. Most of our clients hit that cap without a second home. In lower-cost areas, you may see a marginal tax savings by writing off a bigger property tax bill.
As I often preach, use your financial plan as a guide to ensure that you can afford a second home. If you want to double-check your plan, you can use this free software.
Once you’ve received the green light from the plan, consider the qualitative factors. What does upkeep look like? How much time will you be able to spend there? You don’t ever want trips to your vacation home to feel like an obligation. If you decide to go for it, give me a shout — I’d love to visit!
Related Content
- Retired and 'Stuck' With a Mortgage Below 4%? You Have Options
- Six Reasons to Use a Real Estate Agent When You Sell
- Three Reasons Not to Use a Real Estate Agent When You Sell
- Find the Best 30-Year Mortgage Rates
- Five Ways to Shop for a Low Mortgage Rate
-
What to Check on Your Car Before a Winter StormWinter storms are expected soon. Get your vehicle ready now to avoid breakdowns, costly repairs and dangerous roadside surprises.
-
Do You Pay Property Taxes in Tennessee? What You Need to Know in 2026Property Taxes State lawmakers are moving to ban state property taxes, but can they stop the local rate spike? Here's how 2026 could lower your Tennessee property tax bill.
-
Should You Be Investing in Emerging Markets?Economic growth, earnings acceleration and bargain prices favor emerging markets stocks right now.
-
Are You and Your Financial Adviser in Sync on Social Security?Deciding when to claim Social Security is tricky if you and your adviser haven't thoroughly covered the topic. Here's how to ensure you're on the right track.
-
How to Find the Best International Moving Company for Your Big Move Abroad (and Avoid Costly Mistakes)It's best to use an international moving company to protect your belongings and budget when relocating to another country. Here's how to find a reputable firm.
-
For High-Net-Worth Retirees, Tax Planning and Estate Planning Are the Main EventsTax and estate planning can have far-reaching results for wealthy retirees and are just as important as investment management. This financial adviser explains.
-
This Overlooked Diversification Tool Can Build Resilience Into Your PortfolioMunicipal bonds can provide a steady income and stability that's separate from federal shifts and global economic headwinds.
-
What Will Happen to Your Business When You Retire? How to Exit Successfully and Thrive in RetirementStepping away from work is extra challenging when you're a business owner, and a successful retirement requires planning that looks beyond the financials.
-
Beyond the Bar: Your 5-Step Guide to Discovering Whether a Lawyer Is ShadyResearch shows you can't rely on some state bar websites to vet a lawyer you're considering hiring. Here's how to check out a lawyer before you hire.
-
6 Practical Steps to Help Keep Your Student Focused on College Rather Than the Financial StrainToo many students drop out due to financial strain. This plan can help families plan for the costs and get timely aid that sees students through to graduation.
-
Are You the Doer or the Visionary of Your Advisory Practice? Here's How You Can Make the Leap to Chief Vision OfficerThe key is to transition from a tactical "doer" to a strategic "chief vision officer" by building the teams, processes and brand so your practice can grow.
