Tax Implications of Owning a Second Home

The tax treatment of a second home depends on how you use it — purely personal, partly rented, or primarily rented. The rules are nuanced, and getting them wrong can cost you thousands. Here's the full picture.

Mortgage Interest Deduction

You can deduct mortgage interest on a second home, but the $750,000 cap on mortgage debt applies across all qualifying residences combined (not per property). If your primary mortgage is $600,000, you can only deduct interest on $150,000 of second-home mortgage debt.

The SALT Cap

The Tax Cuts and Jobs Act caps the State and Local Tax (SALT) deduction at $10,000 total — covering property taxes on all properties, plus state income taxes or sales taxes. High-property-tax states hit this cap quickly, limiting the benefit of property tax deductions on second homes.

The Masters Exception (14-Day Rule)

If you rent your second home for 14 days or fewer per year, all rental income is completely tax-free. You don't even need to report it. This is called the 'Masters Exception' because Augusta National Golf Club homeowners historically rented their homes during the Masters tournament.

Mixed-Use Rental Rules

If you rent more than 14 days and also use the property personally, you must allocate expenses between personal and rental use:

1. Calculate the percentage of rental days vs. total days used.
2. Deduct that percentage of mortgage interest, taxes, insurance, utilities, and depreciation against rental income.
3. Personal-use portion is subject to normal deduction limits.
4. Net rental losses may be limited by passive activity rules.

Capital Gains on Sale

The primary residence exclusion ($250,000 single / $500,000 married) does not apply to a second home. When you sell, any gain above your basis is taxed as capital gains — at 15%–20% depending on your income level. You can potentially convert a second home to a primary residence by living in it for 2 of the 5 years before sale.