Interest on a mortgage of a second home is deductible from your taxable income if the mortgage is used to buy, build or substantially improve the second home. A condominium unit, house, mobile home, boat, cooperative or house trailer that has cooking, sleeping and toilet facilities is considered a home.
The deduction can be used only if you itemize, but the amount may be limited if the loan surpasses the fair market value of the home itself, or if the combined loans of your main and second home exceed $1 million (half if filing separately).
The interest of a home equity loan or line of credit is also fully deductible except when the indebtedness is over the fair market value of the home less the existing mortgage.
You don't need to report income on a second home rented for less than 15 days a year, and used as home the rest of the time. It is also considered residence if you or any family members uses it for most of 14 days, or 10% of the time you rent it out. The expenses may not be deductible, but the taxes and interest are.
If you rent it out more than 15 days a year, the income derived must be reported. However, the expenses of renting including depreciation, interest and taxes may be deductible up to a limit. Excess expenses not charged may be carried over in the succeeding year.
Selling your second home means you get taxed on capital gains, long-term if you owned the home more than a year, short-term if not. Loss on the sale is not deductible. But if the home was for rent, profit is taxable as capital gains and loss is deductible. The portion of the profit attributed to depreciation is taxable at 25% maximum.
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