This is a question that gets asked more and more every year as some taxpayers consider investing in rental property, while others approaching retirement look at buying a second home in their dream location. There are many reasons why someone may own a second home, and I’m pleased to say that their mortgage interest may very well be deductible in one way or another. As we always say, certain rules and conditions must be met before a deduction may be taken but, in this case, there is a good deal of room for maneuver.
Mortgage interest is usually deducted on Schedule A - Itemized Deductions. A qualified home for the purpose of the home mortgage deduction can be the taxpayer’s main home or second home. This may not be news to you, but now comes the surprising part: a “home” can be a house, condo, co-op, mobile home, camper van, house trailer, boat, or other similar property (even if it is located outside the United States) – as long as it has sleeping, cooking and toilet facilities. A taxpayer’s main home is defined as where they usually live, but there is no requirement for the taxpayer to make use of their second home at any time during the year. Mortgage interest paid for this second home may be eligible for the deduction, provided that the property qualifies as a home under the conditions described above.
This means that Oliver, who has his main home in Wisconsin but also owns a houseboat moored in the Florida Keys, could use Schedule A to deduct the mortgage interest paid on both properties – even though he was unable to make it to Florida at all last year.
However, we must add that there is a limit to the total amount of the mortgage interest that can be deducted on Schedule A. Oliver can only deduct interest on $750,000 of his underlying mortgage debt (or $1,000,000 if the original mortgage loan originated before December 16, 2017). This applies to the total of the mortgages on his main home and second home.
After looking at his work schedule for the coming year, Oliver realized that he may have to skip Florida again. Rather than having the houseboat sitting idle, he decided to make it available for rent during the busy winter season. In this case, the houseboat would become a rental property and would no longer qualify as a second home. His mortgage interest would still be deductible, but this would be a business expense on Schedule E - Supplemental Income and Loss instead of a personal expense on Schedule A.
If Oliver’s work schedule were to become less hectic in later years, he may be able to spend some time on the houseboat during periods when it is not being rented out. In this case, Oliver would still be able to deduct his houseboat mortgage interest payments, but the total amount would be divided between Schedule A and Schedule E based on the relative proportions of his personal and business use of the houseboat for the year.
To sum it all up, no matter whether you use your second home for personal purposes, for business purposes, or for a combination of both, the interest you pay on a mortgage for that home may very well be deductible on your tax return. Make sure to keep good records, and then one day when you take that long-awaited house trailer trip through the Rocky Mountains, you could have the satisfaction of knowing that Uncle Sam is helping to cover your expenses!