Second Home Tax Rules: Deductions, the 14-Day Rule, and Capital Gains

A second home carries its own set of federal tax rules that split cleanly into three stages: what you can deduct while you own it, what happens when you rent it out, and what you owe when you sell. The second home tax rules cap your mortgage interest deduction at combined acquisition debt of $750,000 across both homes, let you skip reporting rental income if you rent for 14 days or fewer, and deny you the $250,000/$500,000 gain exclusion that primary residences enjoy at sale. How the IRS classifies the property in a given year determines which of those rules bite hardest.

How the IRS Classifies Your Second Home

Everything downstream depends on one question: how many days did you use the property personally versus how many days did you rent it at a fair market rate?

Under 26 U.S.C. § 280A, the IRS treats the property as a “residence” if your personal use exceeds the greater of 14 days or 10% of the days you rented it at market rate.¹ Stay at or below those thresholds and it’s classified as a rental instead, which changes how losses and deductions work.

“Personal use” is broader than your own visits. Any day a family member stays there without paying fair market rent counts, and family for this purpose includes siblings, spouse, parents, grandparents, and children or grandchildren.² Letting a friend stay at a below-market rate counts too. Days you spend working substantially full time on repairs and maintenance don’t count as personal use, even if your family is there using the pool that same day.³

Keep a dated log of every occupied day and its purpose. Without it, the IRS will read the classification against you at audit.

Deductions While You Own It

If you itemize on Schedule A, a second home offers two significant write-offs.⁴ Both are capped.

Mortgage Interest

You can deduct interest on mortgage debt secured by the second home, but the combined acquisition debt on your primary residence and second home cannot exceed $750,000 ($375,000 if married filing separately). Carry $900,000 across both properties and only the interest attributable to the first $750,000 is deductible. This limit applies to loans taken out after December 15, 2017; older mortgages may still use the previous $1,000,000 cap.⁵

The mortgage must be secured by the property itself. An unsecured personal loan or a loan against a brokerage account doesn’t qualify. The property also needs basic living accommodations: sleeping space, a bathroom, and cooking facilities. A boat, RV, or travel trailer with all three can qualify.⁶

Mortgage Points

Points paid on a primary residence purchase are often fully deductible in the year paid. Second homes don’t get that. Points on a loan secured by a second home must be spread over the life of the loan.⁶ On a 30-year mortgage, you deduct 1/30th each year.

The SALT Cap

Property taxes on the second home are deductible but fall under the state and local tax (SALT) cap. The One Big Beautiful Bill Act, signed into law on July 4, 2025, raised the cap. For 2026, the SALT deduction limit is approximately $40,400 (the $40,000 base increases 1% annually through 2029), and that number covers all state and local taxes combined — income, sales, and property taxes on every property you own.

High earners lose ground. The cap phases down at 30% for every dollar of adjusted gross income above roughly $505,000 in 2026, eventually returning to $10,000 for the highest earners. Below $500,000, the higher cap is a real improvement over the flat $10,000 limit that ran from 2018 through 2024.

Renting It Out: The 14-Day Rule and What Comes After

Rent 14 Days or Fewer

Rent the property for 14 days or fewer during the year and you report none of the income, regardless of amount.¹ The property must qualify as your residence for the exclusion to apply. You still deduct mortgage interest and property taxes on Schedule A, but you cannot deduct rental-specific expenses like cleaning or advertising.

Rent 15 Days or More

Cross the 14-day line and every dollar of rental income becomes taxable, reported on Schedule E.⁷

Expenses get allocated based on the ratio of rental days to total use days.¹ Use the home 120 days total and rent it 90 of those, and 75% of eligible operating costs (utilities, insurance, repairs, cleaning) can be deducted against rental income. You can also depreciate the rental-use portion of the property’s value.

The critical limitation: if the property is classified as your residence because personal use exceeded the 14-day/10% threshold, rental deductions cannot exceed gross rental income.¹ You cannot create a rental loss to offset wages. Unused deductions carry forward, still subject to the same cap.

If personal use stays low enough that the property is classified as a rental, the passive activity loss rules apply. Rental real estate losses are generally passive and can only offset passive income. If you actively participate in managing the rental — choosing tenants, setting rent, approving repairs — you can deduct up to $25,000 in rental losses against regular income. That allowance phases out starting at $100,000 of modified adjusted gross income and disappears entirely at $150,000. You must own at least 10% of the property.⁸

Rental profits may also trigger the 3.8% Net Investment Income Tax when modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not indexed for inflation.⁹

Selling: Capital Gains, Basis, and Depreciation Recapture

Sellers of a primary residence can exclude up to $250,000 in profit ($500,000 married filing jointly) from capital gains tax.¹⁰ That exclusion does not apply to a second home. Every dollar of profit is taxable at long-term capital gains rates if you owned the property more than a year.

For 2026, the long-term capital gains brackets are:

0%: taxable income up to $49,450 (single) or $98,900 (married filing jointly)
15%: taxable income from $49,450 to $545,500 (single) or $98,900 to $613,700 (married filing jointly)
20%: taxable income above those thresholds

Most second-home sellers land at 15%. The 3.8% Net Investment Income Tax can apply on top, pushing the effective rate on the gain to 18.8% or 23.8%.⁹

Converting to a Primary Residence

You can claim the Section 121 exclusion by converting the second home into your principal residence and living there at least two of the five years before sale, but the exclusion will not cover the full gain. Under the nonqualified use rules, any gain allocated to periods after January 1, 2009 when the home was not your principal residence stays taxable.¹⁰

Own a home 10 years, use it as a second home for 6, then live in it as your primary residence for 4, and 60% of the gain is allocated to nonqualified use and remains taxable. Only the remaining 40% qualifies for the exclusion. Time after the last date you used the home as your principal residence doesn’t count as nonqualified use, so there’s no need to rush a sale after moving out.

Reducing the Gain with Adjusted Cost Basis

Taxable gain is sale price minus adjusted cost basis, not just the original purchase price. Spending that adds to basis and shrinks the gain includes:

Closing costs from the original purchase: title insurance, title search fees, transfer taxes, survey fees, and recording fees
Capital improvements that add value, extend useful life, or adapt the home to a new use — a new bedroom, bathroom, deck, garage, central air, new roof, security system, kitchen remodel, or finished basement¹¹
Selling expenses: real estate commissions, advertising, and legal fees tied to the sale

Routine repairs like painting, fixing leaks, or patching drywall don’t count unless they were part of a larger renovation.¹¹ Keep receipts from the day you buy. The gap between a $50,000 gain and a $150,000 gain often comes down to documentation.

Depreciation Recapture

If you rented the property and claimed depreciation, the IRS wants some of that back. The portion of gain attributable to depreciation taken (or that you were entitled to take) is taxed as unrecaptured Section 1250 gain at a maximum rate of 25%, higher than the standard long-term capital gains rate.¹² Recapture applies even if you converted the property to a primary residence before selling, and it’s separate from any capital gains tax on the remaining profit.

Deferring the Gain with a 1031 Exchange

A 1031 exchange lets you sell investment real estate and reinvest the proceeds in a new property without immediately paying capital gains tax.¹³ The property must be held for investment or productive use in a business. A second home used purely for personal vacations does not qualify.¹⁴

Revenue Procedure 2008-16 created a safe harbor for certain vacation homes. Both the relinquished and replacement property must meet these standards in each of the two 12-month periods surrounding the exchange:¹⁵

Rented at fair market rate for at least 14 days in each 12-month period
Personal use no more than the greater of 14 days or 10% of the rental days in each 12-month period
Held for at least 24 months

A vacation home that sits empty most of the year and never gets rented won’t meet the safe harbor.

Once you sell, two clocks start at the same time. You have 45 calendar days to formally identify replacement properties in writing and 180 calendar days to close on one of them.¹³ The deadlines are absolute. If your tax return is due before the 180-day period expires, file an extension.

A qualified intermediary must hold the sale proceeds. You cannot touch the money, and your real estate agent, attorney, accountant, or anyone who has worked for you in the previous two years is disqualified.¹⁴ If the intermediary goes bankrupt while holding your funds, you lose both the money and the tax deferral.

Penalties for Getting It Wrong

Misclassifying the property or underreporting rental income carries real cost. The IRS imposes a 20% accuracy-related penalty on any underpayment resulting from negligence or a substantial understatement of income tax.¹⁶ An understatement is substantial when it exceeds the greater of 10% of the tax that should have been on your return or $5,000.

Failure to pay on time draws a separate penalty of 0.5% per month on the unpaid balance, up to 25%. That rate rises to 1% per month after the IRS issues a notice of intent to levy.¹⁷ Interest compounds on both the unpaid tax and the penalties.

Common audit triggers for second-home owners: claiming rental losses on a property that should be classified as a residence, deducting personal expenses as rental costs, and failing to report short-term rental income above the 14-day threshold. The dated usage log is your best defense.

1
Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
2
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
3
Internal Revenue Service. Publication 527, Residential Rental Property
4
Internal Revenue Service. Instructions for Schedule A (Form 1040)
5
Office of the Law Revision Counsel. 26 USC 163 – Interest
6
Internal Revenue Service. Topic No. 504, Home Mortgage Points
7
Internal Revenue Service. Instructions for Schedule E (Form 1040)
8
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
9
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
10
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
11
Internal Revenue Service. Publication 523, Selling Your Home
12
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
13
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
14
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
15
Internal Revenue Service. Revenue Procedure 2008-16
16
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
17
Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax