Tax Benefits of Principal and Second Residences

 

The categories of deductions are covered in detail below via excerpts of the IRC (Title 26 of the U.S. Code).  They are also covered in IRS Pub 936 and IRS Pub 530, "Tax Information for Homeowners".  Second or Vacation homes is coverd in IRS Pub 527.

 

Home Loan Interest & Mortgage Insurance Premium Deduction

Excerpt from § 163

 

(3) Qualified residence interest
 
For purposes of this subsection—
 
(A) In general the term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—
 
(i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or
(ii) home equity indebtedness with respect to any qualified residence of the taxpayer.  For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.
 
(B) Acquisition indebtedness
 
(i) In general The term “acquisition indebtedness” means any indebtedness which—
 
    (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
    (II) is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.
 
(ii) $1,000,000 limitation The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return).
 
(C) Home equity indebtedness
 
(i) In general The term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed—
 
    (I) the fair market value of such qualified residence, reduced by
    (II) the amount of acquisition indebtedness with respect to such residence.
 
(ii) Limitation The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).
 
(D) Treatment of indebtedness incurred on or before October 13, 1987
 
(i) In general In the case of any pre-October 13, 1987, indebtedness—
 
    (I) such indebtedness shall be treated as acquisition indebtedness, and
    (II) the limitation of subparagraph (B)(ii) shall not apply.
 
(ii) Reduction in $1,000,000 limitation The limitation of subparagraph (B)(ii) shall be reduced (but not below zero) by the aggregate amount of outstanding pre-October 13, 1987, indebtedness.
 
(iii) Pre-October 13, 1987, indebtedness The term “pre-October 13, 1987, indebtedness” means—
(I) any indebtedness which was incurred on or before October 13, 1987, and which was secured by a qualified residence on October 13, 1987, and at all times thereafter before the interest is paid or accrued, or
 
    (II) any indebtedness which is secured by the qualified residence and was incurred after October 13, 1987, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing).
 
(iv) Limitation on period of refinancing Subclause (II) of clause (iii) shall not apply to any indebtedness after—
 
    (I) the expiration of the term of the indebtedness described in clause (iii)(I), or
    (II) if the principal of the indebtedness described in clause (iii)(I) is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).
 
(E) Mortgage insurance premiums treated as interest
 
(i) In general Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer shall be treated for purposes of this section as interest which is qualified residence interest.
 
(ii) Phaseout The amount otherwise treated as interest under clause (i) shall be reduced (but not below zero) by 10 percent of such amount for each $1,000 ($500 in the case of a married individual filing a separate return) (or fraction thereof) that the taxpayer’s adjusted gross income for the taxable year exceeds $100,000 ($50,000 in the case of a married individual filing a separate return).
 
(iii) Limitation Clause (i) shall not apply with respect to any mortgage insurance contracts issued before January 1, 2007.
 
(iv) Termination Clause (i) shall not apply to amounts—
 
    (I) paid or accrued after December 31, 2010, or
    (II) properly allocable to any period after such date.
 
(4) Other definitions and special rules
 
For purposes of this subsection—
 
(A) Qualified residence
 
(i) In general The term “qualified residence” means—
 
    (I) the principal residence (within the meaning of section 121) of the taxpayer, and
    (II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A (d)(1).
 
(ii) Married individuals filing separate returns If a married couple does not file a joint return for the taxable year—
 
    (I) such couple shall be treated as 1 taxpayer for purposes of clause (i), and
    (II) each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence.
 
(iii) Residence not rented For purposes of clause (i)(II), notwithstanding section 280A (d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year.