Second home tax deductions and rules hinge on one question: how many days a year do you use the place yourself versus rent it to someone else? That day count determines whether the IRS treats the property as a residence or a rental, and the classification controls which write-offs you get, how rental income is taxed, and what you owe when you sell. For 2026, mortgage interest is deductible on combined acquisition debt up to $750,000, the SALT cap for property and state income taxes has risen to roughly $40,000 for most filers, and a sale does not qualify for the $250,000/$500,000 primary-residence exclusion.
Residence or Rental: The Day-Count Test
Under Internal Revenue Code Section 280A, your property counts as a “residence” if you use it personally for more than the greater of 14 days or 10% of the days it was rented at fair market value during the year.1Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. Personal use includes days your family stays there, days a friend uses it without paying full market rent, and days you spend on repairs if you also use the property recreationally.
Rent the place 200 days and stay 15 days yourself, and your personal use is under 10% of rental days, so the IRS treats the property as a rental. You report income and expenses on Schedule E.2Internal Revenue Service. Instructions for Schedule E (Form 1040) Rent it 100 days and use it personally for 20, and personal use exceeds 10% of rental days, so it is a residence. Keep a simple log of every night; misclassifying the property puts you under the wrong set of rules and can trigger penalties on audit.
Mortgage Interest on a Second Home
Itemizers can deduct interest paid on mortgage debt used to buy, build, or substantially improve a second home. Combined acquisition debt across your primary and second residence cannot exceed $750,000 for the full deduction ($375,000 if married filing separately).3Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction Above that threshold, only interest attributable to the first $750,000 of principal is deductible. Mortgages taken out on or before December 15, 2017 still qualify under the older $1 million limit.4Office of the Law Revision Counsel. 26 USC 163 – Interest
Home equity loans and HELOCs carry an extra restriction. Interest on a home equity loan secured by your second home is deductible only if you used the borrowed funds to buy, build, or substantially improve that same property. Use the line to pay off credit cards or fund a vacation, and the interest is not deductible regardless of the loan amount.5Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2 Your lender sends Form 1098 each year showing the interest paid.
Property Tax and the SALT Cap
Property taxes on a second home are deductible on Schedule A, but they fall under the State and Local Tax cap. For 2026, SALT is capped at $40,000 for most filers ($20,000 if married filing separately), a significant increase from the $10,000 ceiling that applied from 2018 through most of 2025.6Internal Revenue Service. Topic No. 503 – Deductible Taxes The cap is indexed annually for inflation through 2029.
Higher earners lose some of that headroom. Once modified adjusted gross income exceeds roughly $500,000 (indexed annually), the SALT cap phases down, though it cannot drop below $10,000. The limit covers the combined total of state and local income taxes (or sales taxes if you elect that option) plus all property taxes across every property you own. Owners of multiple homes in high-tax jurisdictions can hit the cap quickly even at $40,000.
Rent It 14 Days or Fewer and Owe Nothing
One of the most favorable provisions in the code for second-home owners is the 14-day rule, sometimes called the “Masters rule.” Rent your home for 14 days or fewer during the year and none of that rental income is taxable. You do not even report it.7Internal Revenue Service. Topic No. 415 – Renting Residential and Vacation Property The daily rate is irrelevant. You could charge $5,000 a night during a major event and owe nothing on the income.
The tradeoff is that you cannot claim rental expenses for those days. Mortgage interest and property taxes still come off on Schedule A as personal itemized deductions, but cleaning fees, management costs, and rental insurance are not deductible since no rental income is reported.8Internal Revenue Service. Publication 527 – Residential Rental Property For owners who rent during one or two high-demand weekends a year, the math works heavily in their favor.
Reporting Rental Income Past 14 Days
Rent the place for 15 or more days and every dollar of rental income becomes reportable on Schedule E.7Internal Revenue Service. Topic No. 415 – Renting Residential and Vacation Property You can deduct the rental-use portion of insurance, utilities, maintenance, and repairs, but each cost must be split between personal and rental days. If you rent 90 days and use the place personally for 30, then 75% of eligible expenses are deductible against rental income.
Here is where owners get an unwelcome surprise. When the property also qualifies as your residence under the day-count test, rental deductions for the year cannot exceed rental income. You cannot generate a paper loss to offset salary or other income.1Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. Excess deductions carry forward but remain subject to the same income cap. This rule catches owners who assume renting a vacation home will throw off a usable tax loss while they also spend weeks there each summer.
When Rental Income Turns Into Self-Employment
Rental income is generally not subject to self-employment tax. Provide hotel-like services to guests beyond basic cleaning between stays, however, and the IRS may reclassify the income as active business earnings. Daily maid service, stocked personalized toiletries, recreational equipment, and concierge amenities can cross the line. Cleaning between guest stays does not. Owners who operate a second home more like a boutique hotel than a passive rental should be aware of the risk.
Depreciation and Passive Loss Limits
When a second home is rented, you depreciate the building (not the land) over 27.5 years on a straight-line basis. That annual deduction reduces taxable rental income. Depreciation is effectively mandatory: the IRS recaptures it when you sell whether or not you actually claimed it, so skipping it gains you nothing.
Rental activity is passive by default, meaning losses generally cannot offset active income like wages.9Internal Revenue Service. Topic No. 425 – Passive Activities, Losses and Credits Unused passive losses carry forward, offset future passive income, or release when you dispose of the property entirely. One exception matters: if you actively participate in managing the rental (approving tenants, setting rental terms, authorizing repairs), you can deduct up to $25,000 of rental losses against non-passive income each year.10Internal Revenue Service. Instructions for Form 8582
That $25,000 allowance phases out once modified adjusted gross income exceeds $100,000, shrinking by $1 for every $2 of income above the threshold and disappearing at $150,000.11Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules Many second-home owners with comfortable incomes cannot use rental losses to reduce the current year’s tax bill.
Capital Gains When You Sell
Selling a primary residence lets you exclude up to $250,000 in gain ($500,000 for married couples filing jointly) under Section 121.12Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence That exclusion does not apply to a second home. The entire profit is subject to capital gains tax.
Long-term capital gains rates for 2026 are 0%, 15%, or 20%, depending on taxable income and filing status. Most second-home sellers land in the 15% bracket. If you claimed (or should have claimed) depreciation during rental years, the portion of gain attributable to that depreciation is taxed at a maximum 25% recapture rate, higher than the standard long-term rate for most filers.
Your taxable gain is the sale price minus adjusted cost basis. Basis starts with the original purchase price and grows with permanent improvements: a new roof, a kitchen renovation, added square footage. Closing costs from the original purchase (title insurance, legal fees, transfer taxes) also add to basis. Routine maintenance like painting or fixing a leaky faucet does not. Keeping receipts across the years of ownership can meaningfully shrink the eventual tax bill.
Moving Into the Second Home Before You Sell
Some owners consider making the second home their primary residence for at least two years, then selling to claim the Section 121 exclusion. It works, but only partially. The code requires you to allocate a share of the gain to “periods of nonqualified use,” meaning years the property was not your principal residence.13Legal Information Institute (LII) / Cornell Law School. 26 USC 121(b)(5) – Exclusion of Gain Allocated to Nonqualified Use
The math is a simple ratio. Own the property 10 years and live in it as your primary home for the final 3, and the nonqualified-use period is 7 years. Seven-tenths of your gain remains taxable; three-tenths qualifies for the exclusion. Time after the last date you used the home as your principal residence does not count as nonqualified use, so you do not lose eligibility for the gap between moving out and closing. Temporary absences of up to two years for job relocation, health issues, or other unforeseen circumstances are also excluded.
Gain attributable to depreciation is handled separately and cannot be sheltered by the exclusion regardless of how long you lived in the home. Depreciation recapture is taxed at up to 25% on top of whatever portion of the remaining gain is excluded.
1031 Exchanges: A Narrow Door
A 1031 like-kind exchange defers capital gains tax by rolling the sale proceeds into another investment property. A second home used primarily for personal enjoyment does not qualify.14Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 The IRS has warned that promoters sometimes push vacation-home exchanges and considers those transactions improper.
Revenue Procedure 2008-16 provides a narrow safe harbor for second homes with a genuine rental history. The property must be owned for at least 24 months before the exchange. During each of the two 12-month periods in that window, it must be rented at fair market value for 14 or more days, and your personal use cannot exceed the greater of 14 days or 10% of the days rented.15Internal Revenue Service. Revenue Procedure 2008-16 Meeting those requirements shifts the property’s character from personal to investment in the IRS’s eyes.
If you qualify, the replacement property must be identified in writing within 45 days of closing the sale, and the exchange must be completed within 180 days or by your tax return due date (including extensions), whichever comes first.16Internal Revenue Service. Instructions for Form 8824 These deadlines are strict and cannot be extended short of a federally declared disaster.
The 3.8% Net Investment Income Tax
Higher-earning second-home owners face an additional 3.8% surtax on top of regular capital gains and income tax on rental profits. The Net Investment Income Tax applies when modified adjusted gross income exceeds $250,000 for married couples filing jointly, $200,000 for single filers, or $125,000 for married filing separately.17Internal Revenue Service. Topic No. 559 – Net Investment Income Tax These thresholds are not indexed for inflation, so more taxpayers cross them each year.
The NIIT hits both rental income during ownership and any capital gain when you sell.18Internal Revenue Service. Questions and Answers on the Net Investment Income Tax The tax is calculated on the lesser of your net investment income or the amount your MAGI exceeds the threshold, so barely crossing the line means only part of the investment income gets hit. Deductible rental expenses reduce net investment income before the calculation, which makes disciplined expense tracking even more valuable for owners above the MAGI thresholds. Report and pay the NIIT on Form 8960, filed with your return.