How To Avoid Tax on a Second Home: What You Can Deduct — and What Happens When You Sell in 2026 

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Owning a second home can provide tax advantages, but they differ from those that apply to your primary home — especially if you rent or sell.

What should you consider? It depends on whether you’re considering buying, want to rent a home you already own or are planning to sell your second home. This guide explains deductions, limits and tax-planning strategies that could affect you in 2026.

Why Second Homes Are Taxed Differently Than Primary Residences

There are two types of personal homes: Your primary residence and a second home. The IRS considers a home your primary residence if you live there for more than half the year, and it’s the mailing address you use for things like your ID and tax returns.

To make buying and owning a home more affordable, the IRS allows you to deduct certain ownership costs on your tax returns, and shields some sale proceeds from capital gains tax if you sell at a profit. You can deduct expenses like mortgage interest and property taxes up to a certain amount, for example.

Additionally, you may be able to deduct similar expenses for a second home, subject to limits, if you own the home for personal use. Those expenses and others might instead qualify as business deductions if the second home is an investment property.

Tax Deductions You Can Claim While Owning a Second Home

The IRS considers your second home a residence if you use it for personal use more than 14 days per year, or more than 10% of the number of days you rent it to others at a fair market price, whichever is more. Second homes qualify for the same types of deductions as primary homes, up to IRS limits, but you must itemize your deductions to qualify.

Property Tax Deductions and the SALT Cap

Up to $40,000 in state and local taxes (SALT), including property taxes, are deductible in tax year 2025. This deduction could benefit homeowners in high-tax states, because the cap is higher than the standard tax deduction of $15,750, and $31,500 for joint filers.

The deduction begins phasing out for taxpayers with income over $250,000 ($500,000 for joint filers). The minimum cap is $10,000.

Mortgage Interest Rules for Second Homes

Mortgage interest on primary and second homes is deductible. Home equity loans count if you use the funds to buy, build or substantially improve the home that secures the loan.

You can deduct interest on up to $1 million of mortgage debt for loans that closed before Dec. 15, 2017, and interest on up to $750,000 of mortgage debt for loans that closed after that.

What If You Rent Out Your Second Home? Rental vs. Personal Use

The IRS treats investment properties differently from residential ones.

Occasional Rentals vs. Regular Rental Use

Occasional rentals affect your home’s residential classification if you rent it out more than 14 days per year, or you live in it fewer than 10% of the number of days you rent it out at fair market value. Beyond that, you have to report your rental income to the IRS.

How Personal-Use Days Affect Deductions

Expenses for an investment property you also use personally are prorated according to the number of days the property was in service for each use. Only the rental prorations are deductible from your rental income.

Rental Income, Expenses and Depreciation Basics

Rental income is taxable if the home qualifies as an investment property under the 14-day or 10% rule. You can reduce your taxable rental income by prorating and deducting mortgage interest and operating costs for the number of days the property was in service as a rental.

You can also save on taxes by depreciating the property — writing off the cost of acquiring and improving the property over many years, beginning when you put it in service.

What Happens Tax-Wise When You Sell a Second Home?

Selling your second home can have tax consequences. What those consequences might be depends on whether the home was a residence or investment property.

Capital Gains Tax on Second Homes

Selling a home for more than its cost basis triggers a capital gain. The gain is taxed as ordinary income if you’ve owned the home for a year or less If you’ve owned the home for more than a year, the gain is taxed at the long-term capital gains rate of 0% to 20%, depending on your income, but you could pay more if you depreciated the property.

Depreciation increases your capital gain by reducing your cost basis. For example, say you’ve claimed $50,000 in depreciation over the years. That $50,000 is considered an “unrecaptured” capital gain and is taxed at a maximum rate of 25%.

Why the Primary-Residence Exclusion Usually Doesn’t Apply

The IRS lets you exclude $250,000 in capital gains — $500,000 for joint filers — from the sale of a residence once every two years. In this context, residence is usually defined as a home you’ve owned for at least two years and have lived in as your primary home for at least two of the last five years. Unless your second home meets that definition, you won’t be able to exclude capital gains when you sell.

Can You Convert a Second Home Into a Primary Residence To Reduce Taxes?

You can convert your second home into a primary residence by living in it for more than half the year and establishing it as your mailing address and the address that corresponds to your voter registration, driver’s license and vehicle registration. But it takes more than that to establish residency for tax purposes.

The ‘2-Out-of-5-Year’ Rule Explained

You’ll need to own and live in your second home for at least two years before the IRS considers it your primary residence. The actual threshold is two of the past five years.

The IRS allows partial exclusions for health- and work-related moves, and unforeseeable events, such as destruction of the home, death of your spouse or co-owner, or divorce.

What This Strategy Can — and Can’t — Do

Conversion can save capital gains tax on a second home you plan to sell later. However, it won’t affect your mortgage interest or SALT deductions. If you’ve been renting the home, weigh potential tax savings against lost rental income and expense deductions.

Other Tax-Planning Strategies for Second-Home Owners

You have a few additional options for minimizing tax on your second home.

Tax-Loss Harvesting

Sale of a rental property can generate a capital loss if you lose money on the sale. Up to $3,000 of that loss might be deductible as part of a strategy called tax-loss harvesting.

1031 Exchanges and When They Apply

A 1031 exchange, also called a like-kind exchange, lets you defer capital gains tax on the sale of a rental home when you purchase another rental home or investment property, and reinvest into another similar investment. Rules for 1031 exchanges are complicated, so consult a tax advisor before planning an exchange.

Timing the Sale and Tracking Cost Basis

Timing helps define whether the home is a residence or investment property, affects capital gains and losses and impacts your cost basis. Tracking your cost basis helps you understand the tax consequences of your sale.

Common Mistakes, IRS Red Flags and Record-Keeping Tips

Attention to detail and careful recordkeeping are key to avoiding unexpected tax consequences.

Common Errors Second-Home Owners Make

Here are some common second-home errors to avoid:

• Overestimating how much time you’ll spend in a home you’re considering purchasing
• Underestimating the costs and time involved in managing a rental home
• Failing to research zoning restrictions, short-term rental restrictions and landlord-tenant rules
• Keeping incomplete financial and residency records, resulting in errors on tax returns
• Overlooking depreciation when considering resale

Documents You Should Keep

Careful documentation helps to ensure accurate tax returns and avoid unnecessary tax. Keep the following:

• Sales agreement
• Closing statement
• Rental history and income
• Improvement and repair receipts
• Receipts for professional fees and advertising
• Mileage log or travel receipts for travel for activities related to the rental
• Proof of residence, including government-issued IDs, tax returns and personal financial statements
• Tax returns
• Bank statements for accounts used for rental activities

Second Home Tax Scenarios — How the Numbers Can Play Out

Here’s how common situations play out according to the property’s use.

Personal use only:

• Mortgage interest deduction on up to $750,000 of total mortgage debt from primary and second home
• Or up to $1 million for loans taken out in or before Dec. 15, 2017
• Up to $40,000 in total SALT deductions for all homes
• No depreciation
• Repairs not deductible
• No capital gains exclusion

Mixed-use:

• Mortgge interest and property taxes should be allocated between personal and rental
• Personal use properties may qualify as itemized deductions, while rental share reduces taxable income
• Depreciation only applies to the rental portion of the property
• Only expenses related to the rental and any imptovements are tax-deductible
• The home doesn’t qualify for the capital gains exclusion when it’s sold

Converted from rental to primary residence, then sold:

• Prior depreciation reduces cost basis
• $250,000 capital gains exclusion

Planning Ahead for Second-Home Taxes

Advanced planning can save you from tax headaches now and if you sell. Here’s how:

• Use the 14-day and 10% rules to determine the classification.
• Limit rental days to qualify for tax-free income.
• Deduct mortgage interest, property taxes, insurance and depreciation if used as an investment.
• Before selling, consider making the home your primary residence to qualify for the capital gains exclusion.

Andrew Lisa contributed to the reporting of this article.

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