Second Homes Are Treated Differently

Interest rates are low, and although they are going up, prices are still low in many resort areas — so this may be your best opportunity to buy a second home.

While a principal residence and a second home have some similar benefits, they have some major differences. A principal residence is the primary home where you live and a second home is used for personal enjoyment while limiting possible rental activity to a maximum of 14 days per year.

The Mortgage Interest Deduction allows a taxpayer to deduct the qualified interest and property taxes on a principal residence and a second home. The interest is limited to a maximum of $1,000,000 combined acquisition debt and a combined $100,000 home equity debt for both the first and second homes.

The gain on a principal residence has a significant exclusion for taxpayers meeting the requirements. The gains on second homes must be recognized when sold. Even if you sell a smaller second home and invest all of the proceeds into a larger second home, you'll need to pay tax on the gain.

Tax-deferred exchanges are not allowed for properties having personal use including second homes.

If the home is owned for more than 12 months, the gain is taxed at the long-term capital gains rate. If the home is owned for less than 12 months, the gain is taxed as ordinary income which would be a considerably higher rate.

Another consideration is that although interest rates are historically low, rates and down-payments are generally higher for second homes, so make sure you are realistic about what you can afford.

The article is intended for informational purposes. Advice from a tax professional for your specific situation should be obtained prior to making a decision that can have tax implications.