Yes, the mortgage interest and real property tax you pay on a second residence are deductible, subject to certain limitations and conditions.
Mortgage Interest Deduction:
- Qualified Residence Interest: Under § 163(h)(3)(A), qualified residence interest includes interest paid on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. A qualified residence can be the taxpayer's principal residence and one other residence selected by the taxpayer for the taxable year (§ 163(h)(4)(A)(i)).
- Acquisition Indebtedness: For acquisition indebtedness, the aggregate amount treated as acquisition indebtedness cannot exceed $1,000,000 ($500,000 if married filing separately) for loans taken out before December 15, 2017. For loans taken out after this date, the limit is $750,000 ($375,000 if married filing separately) (§ 163(h)(3)(B)(ii) and § 163(h)(3)(F)(i)(II)).
- Home Equity Indebtedness: For home equity indebtedness, the aggregate amount cannot exceed $100,000 ($50,000 if married filing separately) (§ 163(h)(3)(C)(ii)). However, for taxable years beginning after December 31, 2017, and before January 1, 2026, the deduction for interest on home equity indebtedness is disallowed (§ 163(h)(3)(F)(i)(I)).
Real Property Tax Deduction:
- State and Local Real Property Taxes: Under § 164(a)(1), state and local real property taxes are deductible. This includes taxes on both your main home and a second home, provided they are based on the value of the real property and levied for the general public welfare.
- Apportionment of Taxes: If you purchase a second home, the real estate taxes are typically divided between the buyer and seller based on the portion of the property tax year each party owned the home. Taxes paid by the buyer for the seller's share are added to the basis of the home and are not deductible (§ 164(d)).
Additional Considerations:
- Form 1098: If you paid $600 or more of mortgage interest during the year, you should receive a Form 1098 from the mortgage holder, which will help you report the deductible interest on your tax return.
- Itemized Deductions: Both mortgage interest and real property taxes are reported as itemized deductions on Schedule A (Form 1040).
In summary, both mortgage interest and real property taxes on a second residence are deductible, provided the mortgage meets the criteria for qualified residence interest and the real property taxes are state or local taxes based on the value of the property. The deductions are subject to the limits on acquisition indebtedness and home equity indebtedness, and you must itemize your deductions to claim them.
Sources:
§ 163. Interest
FSA 200137033
Publication 530 (2023)
§ 164. Taxes
Publication 936 (2023)
PLR 9026033
