What makes a second home, specifically?
When it comes to tax purposes, a property can be considered a second home under two conditions:
- You live in it for at least 14 days each year.
- You live in it for 10% of the days you rent it out.
You have to satisfy the greater option. For example, if you rent out a home for 180 days of the year and live in it for 18 days or more, it's considered a second home for things like the mortgage interest deduction.
Many lenders have more stringent requirements than the IRS. In fact, many lenders won’t offer second home financing if you plan to rent out the home at all.
Why the distinction is important
Second homes are treated differently than investment properties when it comes to taxation of rental income.
If you rent your second home for two weeks or less in a year, you can keep all the rental income it generates. The IRS won’t touch a penny.
But if you rent a property for more than two weeks, it’s important to make a distinction between a second home and an investment property.
In either case, you must report rental income. You can deduct certain expenses of property ownership and maintenance, too. Second homes can use the mortgage interest tax deduction if they meet the IRS requirements above. But they can't use the depreciation benefit that investment property owners get.
Financing is another big consideration. Second home loans are generally easier to qualify for and come with lower interest rates than loans made on investment properties.
Most often, lenders qualify vacation homes as second homes. To qualify for second home financing, properties generally must be located in a vacation destination, such as at the beach or in the mountains. They must be a certain distance away from the borrower’s primary residence, too.
Finally, the distinction between a second home and a primary residence is important when you sell the home. When a primary residence is sold, the owner can exclude up to $250,000 of capital gains ($500,000 for married couples) from the sale. This exclusion isn't available when you sell a second home.
The definition depends on what you need it for
There are three separate definitions of a second home that you might need to know:
- For the primary residence capital gains tax exclusion, a second home is one you didn’t own for at least two of the previous five years and didn’t live in as your main home in two of the previous five years.
- For tax purposes, a second home is one you live in for at least two weeks each year or 10% of the days the home is rented, whichever is more.
- For financing purposes, a second home is one that's not your primary home, but isn’t rented to anyone else.
Be sure to understand which purpose you're defining your home for, and you'll always make the right call.