Owning a second home or vacation property can come with significant tax benefits—if you understand the IRS rules. In 2025, you may still deduct mortgage interest and property taxes on a second home, but certain limitations apply depending on how the property is used (personal, rental, or mixed-use). Let’s explore how deductions work when you have multiple homes.
🏠 What Qualifies as a “Home” for Tax Purposes?
The IRS defines a “home” as a house, condo, cooperative, mobile home, house trailer, or boat with sleeping, cooking, and toilet facilities. A second home or vacation property counts if it meets these criteria and is primarily for personal use.
💡 Mortgage Interest Deduction Rules for Multiple Homes
- You can deduct mortgage interest on up to **two homes** (your primary residence and one second home).
- The total mortgage debt limit is:
- $750,000 for mortgages taken out after Dec 15, 2017
- $1 million for older mortgages (grandfathered in)
- Both loans must be “acquisition debt”—used to buy, build, or improve the home.
- Interest on home equity loans or HELOCs is only deductible if the funds were used to substantially improve the home.
📄 Reporting Mortgage Interest
Mortgage interest is reported on Schedule A (Form 1040). Lenders will issue a Form 1098 for each mortgage, but if you finance your second home through a private lender, you may need to keep your own records and attach a statement to your return.
🏡 Property Tax Deduction on Second Homes
- You can deduct property taxes paid on both your primary and secondary residences.
- The deduction is part of the SALT (State and Local Tax) cap, which remains at:
- $10,000 total for all state/local income or sales and property taxes ($5,000 if MFS)
- This cap applies to the aggregate amount, not per property
- If your combined property taxes exceed the SALT cap, you may not see a full deduction benefit.
🏖️ What If You Rent the Property Out?
If your second home is also used as a rental, the tax rules shift significantly. The property becomes a mixed-use or income-producing property, and deductions are divided between personal and rental use.
Mixed-Use Rules (Personal & Rental):
- If you use the home for personal purposes more than 14 days or more than 10% of the days it’s rented, you must allocate expenses based on use.
- Rental portion: mortgage interest, taxes, utilities, repairs, and depreciation may be deductible on Schedule E.
- Personal portion: property taxes and mortgage interest may still be itemized on Schedule A within existing limits.
🔁 Refinancing and Home Equity on Second Homes
- If you refinance your second home, interest on the new loan is deductible only up to the remaining acquisition debt at the time of refinancing.
- Interest on cash-out portions is not deductible unless used for capital improvements on the same home.
- Keep records of how funds were used to support your deduction claims.
📋 Example Scenario
Casey owns a primary residence and a lake house. He pays:
- Primary home mortgage interest: $9,000
- Second home mortgage interest: $6,000
- Property taxes (both homes): $12,000
Casey can deduct the full $15,000 in mortgage interest on Schedule A. But his property tax deduction is limited to $10,000 due to the SALT cap. The remaining $2,000 is not deductible.
🧠 Planning Tips
- If your SALT deduction is capped, consider other strategies to reduce taxable income (e.g., charitable contributions, HSA contributions).
- Track personal vs. rental use days carefully if the property has dual purpose.
- For income-producing homes, keep detailed records for Schedule E deductions.
- Check your mortgage origination date to determine which deduction cap applies.
✅ Summary
You can deduct mortgage interest and property taxes on your second home—but within strict IRS limits. Mortgage interest on up to two homes is deductible within the applicable debt cap, and property taxes across all properties fall under the $10,000 SALT limit. Renting the property or using home equity loans may further affect deductibility. With proper planning and recordkeeping, you can make the most of your vacation home’s tax benefits in 2025.
