How to Avoid Taxes on a Second Home (Legally)

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Owning a second home can come with significant tax advantages — if you know how to use it strategically. From tax-free rental income to deductions and capital gains exclusions, there are several ways to lower or avoid taxes on your second home. This guide covers the IRS rules, usage tests, and smart strategies to help you minimize your tax liability.

What Counts as a Second Home for Tax Purposes?

There are two types of personal homes: Your primary residence and a second home. The IRS considers a home to be your primary residence if you live there for more than half the year — remember to account for leap years when calculating the days — and it’s the address you use for your:

• Mailing address
• Voter registration
• Federal and state tax returns
• Driver’s license
• Car registration

You can deduct expenses like mortgage interest and property taxes up to a certain amount with your primary residence. You may be able to deduct similar expenses with a second home, but only if you classify it as such for tax purposes. A second home can be a personal residence or an investment property. The key differentiators are how often you use it and if and how you rent it.

Your Taxes Depend on How You Use and Rent Your Second Home

The IRS considers a second home a residence if you live in it for at least 14 days each year or follow the 10% rule, which requires you to live in it for at least 10% of the number of days you rent it at fair market value to non-family members.

• An example of the 10% rule is that if you rent your second home for 200 days per year, you must use it for at least 20 days for the IRS to consider it a residence.

Conversely, second homes are considered investment properties if their owners don’t occupy them for more than 14 days per year or rent them more than 90% of the time. Note that Investment property owners must file Schedule E and Schedule C forms to report their rental income as business earnings to the IRS.

Here’s a look at the different potential tax treatments.

When Can You Deduct Expenses on a Second Home?

Your second home can provide several tax benefits. 

• If it’s a residential home, you can deduct mortgage interest up to $750,000 as long as the second home secures the loan. 
• If your mortgage on your second home originated before Dec. 16, 2017, you can deduct up to $1 million in mortgage interest. 
• You can also deduct state and local property taxes — up to $10,000, combined — for all real estate taxes between your homes.

How to Earn Tax-Free Rental Income (The 14-Day Rule)

Renting out your second home can be a great way to earn extra income, but it also changes how you handle property taxes at tax time.

If you rent your second home for 14 days or fewer during the year, the IRS considers it a personal residence. That means you don’t have to report any rental income, but you also can’t deduct rental expenses. Property taxes in this case can still be deducted (within SALT limits), just like on a primary home.

However, if you rent the property out for more than 14 days, the IRS treats it as a rental property. That unlocks a whole new set of rules. You’ll need to report the rental income, but you can also deduct a portion of your expenses — including property taxes, mortgage interest, maintenance, and utilities – based on how many days the home was rented versus used personally.

The key is to keep solid records of both personal and rental use. The number of rental days directly affects how much you can deduct and whether you’re filing as a landlord or simply a homeowner with a vacation property. Getting this right can mean a big difference in what you owe–or what you save–come tax time.

How To Turn Your Second Home Into a Primary Residence

To establish your second home as your primary residence, you must legally establish it as your mailing address and the address that corresponds to your voter registration, driver’s license and vehicle registration. This can offer enhanced tax benefits, mainly if it’s located in a state with lower personal income taxes and/or lower property tax rates.

Take this example: A New Jersey resident owns a vacation home in Pennsylvania’s Pocono Mountains. In New Jersey, the top income tax rate is 10.75%, and tax breaks for seniors, the disabled, and some military members are limited. By contrast, Pennsylvania has a much lower income tax rate of 3.07% and offers more generous property tax benefits. The state excludes part of a primary home’s value from taxation and provides rebates to seniors and disabled residents with qualifying incomes.

How To Use a Second Home as an Investment Property

If you choose to rent out your second home, how you manage the rental, the number of days you rent it and your personal use can all affect your taxes. Here are the three main scenarios for renting out your second home and how the IRS treats each.

Rent Your Second Home for 14 Days or Less

In this case, the IRS treats your property as a personal residence, not a rental. That means you can still deduct mortgage interest and property taxes (up to the SALT cap) on your personal tax return.

Bonus: You don’t have to report the rental income, so those 14 days of rent are completely tax-free.

Use the Home Personally for More Than 14 Days or Follow the 10% Rule

If you use your second home personally for more than 14 days or more than 10% of the total rental days, the IRS still considers it a personal residence. You can deduct mortgage interest and property taxes, but rental deductions are limited.

Heads up: You can deduct expenses tied to rental income, but only up to the amount of income earned. You can’t claim a loss in this case.

Rent It for More Than 14 Days and Use It Personally for Less Than 14 Days

In this scenario, the IRS classifies the property as a rental or investment property. You can’t deduct mortgage interest or property taxes as personal itemized deductions–but you can deduct them as business expenses.

Upside: As an investment property, you can deduct more, including mortgage interest, property taxes, insurance, maintenance, utilities, depreciation, and more, even without itemizing.

Don’t forget: You’ll need to file Schedule E (or Schedule C in some cases) to report rental income and deduct related expenses.

Capital Gains Tax Rules for a Second Home

There’s another benefit when it comes time to sell. 

The capital gains tax exclusion for your primary residence allows you to exclude up to $250,000 in capital gains (or $500,000 if married filing jointly) when selling your home. 

• Example: A married couple that bought a home for $200,000 and later sold it for $700,000 owes no capital gains taxes.

However, you must meet the ownership and use test to qualify for the capital gains tax exclusion: 

• You must have lived in the home for at least two out of the last five years
• The home must be your primary residence
• You haven’t used the exclusion on another home in the last two years

Capital gains taxes are based on your income and how long you held the property. If you held it for less than one year, you’ll pay short-term capital gains at your ordinary income tax rate. If you held the property for at least a year or more, you’ll pay a lower long-term capital gains rate. Here’s how it breaks down:

Long-Term Capital Gains Tax Table 2025

Income Tax Table 2025

States That Offer Property Tax Breaks on Second Homes

Not all second homes are taxed equally — especially when it comes to state and local property tax laws. While the federal government sets broad rules, some states offer special property tax exemptions or discounts for second homes, vacation properties, or even homes in designated areas.

For example, Florida allows certain homestead exemptions that may apply if the second home is your primary residence for part of the year. In Colorado, second homes in resort areas can sometimes qualify for lower rates if rented seasonally. Other states like Texas or New York may offer tax abatements, assessment freezes, or special treatment for seniors and veterans — regardless of whether it’s your primary residence.

Because these breaks vary widely by state and even by county, it’s worth checking with your local tax assessor’s office to see what property tax savings might be available on your second home. A few minutes of research could save you hundreds — or even thousands — each year.

Key Tax Strategies for Second Homes

• Rent smart: Keep personal use low and limit rental days to qualify for tax-free income.
• Track expenses: Deduct mortgage interest, property taxes, insurance, and depreciation if used as an investment.
• Establish residency: Before selling your second home, consider making it your primary residence to qualify for the capital gains exclusion.
• Time your use: Use the 14-day and 10% rules to determine how the IRS will classify your second home.
• File correctly: Use Schedule A for personal deductions or Schedule E for rental income.

Daria Uhlig contributed to the reporting of this article.

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