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A vacation home allows you to escape from the grind of work, the stress of your daily routine and even some of your tax bill. Yes, in addition to giving you a place to spend your summers -- or winters -- your vacation home can also give you an extra tax deduction if you've financed the purchase with a mortgage.
The IRS lets you deduct not only the interest on your main home, but also the interest on a second home, which can be a vacation home. It has to have bathroom, cooking and sleeping facilities, so if your idea of a vacation home is an RV, as long as it has those three, you meet the criteria. In addition, you also have to use it for at least 14 days or 1/10th of the time that you rent it out. If you don't rent it out at all, you don't have to use it for it to qualify.
You can have only one second home at a time for the purposes of the mortgage interest deduction, so if you're paying off mortgages on multiple second homes, you'll have to pick the one that gives you the greatest benefit each year. You can choose a different second home each year, but you can only switch mid-year in certain circumstances. These include if you change your main home and elect to use your former main home as your second home or if you sell one second home and then start deducting the interest from another vacation home as your new second home.
The government's generosity has its limits, albeit very high ones. You can only deduct the interest on the first $1 million of mortgage debt on your main and vacation home combined. If you're married filing separately, the limit is half a million for each spouse. For example, if you're married filing jointly and have a $500,000 mortgage on your main home and a $300,000 mortgage on your vacation home, all your interest is deductible. However, if that vacation home mortgage were $600,000 instead, the interest on $100,000 of your debt --that is, the amount that exceeds $1 million -- wouldn't be deductible.
The deduction for the interest on your vacation home is combined with the deduction for interest on your main home on your tax return, but you have to itemize to claim it. If you receive a Form 1098 from your lender, the interest goes on line 10 of Schedule A. If you don't receive a Form 1098, report the interest on line 11. Then, once you've combined it with your other itemized deductions, the total goes on line 40 of Form 1040, replacing your standard deduction.
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