Can you deduct mortgage interest on a second home?

October, 11 2024 by Steve Banner, EA, MBA

That’s what Wendy asked me last week when we bumped into one another at our local coffee shop. It was obviously something that was at the top of her mind because we had barely said hello before she asked her question. After mentally admonishing myself for not having checked for tax clients prior to entering the store, I told Wendy that there was a very good chance she could take the deduction – but that it all depended on the details of her situation.

After she had finished rolling her eyes about my usual “it depends” answer to her tax questions, she began to fill me in on the story while we sat outside with our coffee. Wendy and her husband have a house in Texas where they live, but they are thinking about buying a condo near their family in Michigan so they can escape the Texas summer heat for several months of the year. They have a mortgage on their Texas house, and they would need to take out another mortgage to buy their second home. I told her that this sounded promising but that she would have to meet several conditions. (Cue another eye-roll).
 

Conditions for the Deduction

I told Wendy that she and her husband may be able to take a deduction for mortgage interest on their second home if:

• The original amount of the mortgage loan on their first (main) home is not greater than $1 million (or $750,000 if that mortgage was taken out after December 15, 2017), and
• The new loan is generally secured by the second home, and
• The proceeds of the loan were used to buy, build, or substantially improve the home, and
• She or her husband (or both) are the owner(s) of the home, and
• They paid the interest themselves, i.e., it was not paid by someone else.

I also informed her that, for the purpose of this deduction, the IRS definition says that a second home can be a house, condominium, cooperative, mobile home, motor home, house trailer, houseboat, or other similar property that has sleeping, cooking and toilet facilities.

 

Claiming the Deduction

By now, I could see Wendy was already dreaming about what she could do with the proceeds of the new tax refund windfall that was coming her way but, at the risk of another exasperated sigh on her part, I had to add a couple of further details to the conversation.

1. She would only be able to claim the deduction if she and her husband qualified to itemize their deductions on Schedule A, and
2. When making the claim, she would have to add together the original debt amounts for the mortgages on both her first and second homes, and her deduction would be generally limited to the interest paid for only the first $750,00 of her total mortgage loans.

After thinking about it all, Wendy summarized, “So you’re saying I might be able to get this deduction, but the amount I can claim might be limited.”

“Yes, that’s about it,” I said. “I can’t remember whether we itemized your return last year, but I can check when I get back to the office. Meanwhile, if you look up your records on your Texas mortgage, between the two of us, we should be able to figure out if you’re likely to qualify to deduct the interest on your Michigan mortgage on your next tax return”.

As I drove back to the office after our conversation, it was my turn to dream. What better way could there be for a tax accountant to spend his off-season than floating around the Great Lakes on a luxury houseboat while claiming a deduction for the mortgage on his second (floating) home?