What are IRS rules on second home interest and how do they affect mortgage deductions?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
The IRS rules on second home mortgage interest deductions are governed by several key provisions of the Internal Revenue Code, Treasury Regulations, and recent legislative changes. Here is a comprehensive explanation of the rules and their impact on mortgage interest deductions for second homes as of 2025:
1. Definition of a Second Home for Tax Purposes
A "second home" is a property that is not your principal residence but is used by you for personal purposes. For a property to qualify as a second home for mortgage interest deduction purposes, it must meet the following criteria:
- Personal Use Requirement: You must use the property for personal purposes for more than the greater of 14 days or 10% of the total days it is rented to others at fair market value during the year. If you do not meet this threshold, the property is not considered a residence for mortgage interest deduction purposes, and the interest may not be deductible as qualified residence interest.
- Rental Use: If the property is rented out for fewer than 15 days during the year, the rental income is not included in gross income, and no rental expenses (including mortgage interest) are deductible. If rented for 15 days or more, expenses must be allocated between personal and rental use.
2. Qualified Residence Interest Deduction
- Secured Debt Requirement: The mortgage must be a secured debt, meaning the loan is secured by the second home itself. Interest on unsecured loans or loans secured by other property (such as a primary residence used to buy a second home) generally does not qualify.
- Qualified Residence Limit: You may only treat two properties as qualified residences for mortgage interest deduction purposes: your principal residence and one other residence (the second home).
3. Debt Limits for Deductible Interest
- Aggregate Limit: The total amount of acquisition indebtedness (debt used to buy, build, or substantially improve the home and secured by the home) for which interest is deductible is limited. For mortgages incurred after December 15, 2017, and before January 1, 2026, the limit is $750,000 ($375,000 if married filing separately). For mortgages incurred before December 16, 2017, the limit is $1,000,000 ($500,000 if married filing separately). These limits apply to the combined total of all qualified residence loans (principal and second home).
- Grandfathered Debt: Debt incurred before October 14, 1987, is "grandfathered" and not subject to these limits, but the amount of grandfathered debt reduces the limit for acquisition debt.
4. Allocation of Interest for Mixed-Use Properties
- If the second home is used for both personal and rental purposes, mortgage interest and other expenses must be allocated between personal and rental use based on the number of days used for each purpose. Only the portion attributable to personal use may be deducted as qualified residence interest (subject to the overall debt limits), while the rental portion may be deductible against rental income on Schedule E.
5. Reporting and Documentation
- Itemized Deductions: To claim the mortgage interest deduction for a second home, you must itemize deductions on Schedule A of Form 1040. The interest must be reported as shown on Form 1098 provided by the lender.
- Recordkeeping: Maintain records of mortgage statements, closing documents, and a log of personal and rental days to substantiate the deduction and allocation.
6. Recent and Upcoming Changes (2025 and Beyond)
- Permanent $750,000 Limit: The One Big Beautiful Bill Act (OBBBA) made the $750,000 limit permanent for tax years after December 31, 2025, and clarified that mortgage insurance premiums are treated as interest for deduction purposes.
- Mortgage Insurance Premiums: For tax years beginning after December 31, 2025, mortgage insurance premiums paid in connection with acquisition indebtedness on a qualified residence (including a second home) are treated as deductible interest, subject to phase-out at higher income levels.
7. Special Situations
- Cooperative Apartments and Leasehold Interests: If you own a cooperative apartment or a long-term leasehold interest that is treated as ownership for tax purposes, you may deduct your share of the cooperative’s mortgage interest or the interest on a loan secured by your leasehold interest, provided the property qualifies as a residence.
- Points and Prepaid Interest: Points paid to acquire a mortgage on a second home must generally be deducted over the life of the loan, not in the year paid.
8. Summary Table of Key Requirements
9. Practical Implications
- If you use your second home only for personal purposes (or rent it out for fewer than 15 days), you may deduct mortgage interest (subject to the debt limits) as an itemized deduction.
- If you rent the home for 15 days or more and use it personally for more than the greater of 14 days or 10% of rental days, you must allocate expenses, and only the personal portion of mortgage interest is deductible as qualified residence interest.
- If your personal use does not meet the threshold, the property is not a qualified residence, and mortgage interest is not deductible as such, though it may be deductible as a rental expense against rental income.
In summary: The IRS allows a deduction for mortgage interest on a second home if it is used sufficiently for personal purposes, the mortgage is secured by the home, and the total acquisition debt for all qualified residences does not exceed the applicable limit. If the home is also rented, expenses must be allocated, and only the personal portion is deductible as qualified residence interest. Recent law changes have made the $750,000 debt limit and the deductibility of mortgage insurance premiums permanent for years after 2025.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
