Tax Deductions for Maintaining Two Households
If you own two homes and itemize deductions on your taxes, some of the expenses of maintaining both households may save you some money in income tax. Each of these home-related deductions have specific eligibility rules that you must satisfy before reporting them on your return. But even if you're eligible for the deductions, your income may limit the amount of tax savings you'll see.
Increased Interest Deduction
One of the more substantial deductions that homeowners take is for mortgage interest payments. If you own two homes, you may be able to deduct all of the interest you pay for both mortgages. This is because the Internal Revenue Service allows the deduction on up to two qualified homes. "Qualified homes" always include your main home -- the place you live most of the time -- and one additional home that you use for personal purposes. In other words, if the second home is purchased as an investment or is primarily rented out, you can't treat it as a qualified home.
Mortgage Interest Limits
When trying to deduct the mortgage interest on more than one household, you may have some limitations to contend with. On mortgage loans taken out after Oct. 13, 1987, to buy, build or substantially improve a home, only total mortgage balances up to $1 million are eligible for the deduction. However, if you're married and don't file a joint return with your spouse, you can only deduct the interest on up to $500,000 on your separate return -- though your spouse can deduct the interest on an additional $500,000 on his own return. For example, if you owe $700,000 on the mortgage for your main home and $450,000 on the second home, your total mortgage indebtedness exceeds the limit by $150,000. As a result, the interest charges allocated to the $150,000 cannot be included in your mortgage interest deduction. However, you may be able to deduct the interest charges on up to $100,000 of the excess as home equity loan interest instead.
Mortgage Insurance Premiums
If either or both of your lenders require you to take out mortgage insurance and the policy isn't effective before 2007, it's possible to treat each year's premium payments as deductible mortgage interest. Prepaid mortgage insurance premiums can't be deducted in full in the year of payment. Instead, you'll need to allocate the premiums over the shorter of 84 months or the life of the mortgage. If you report adjusted gross income of more than $100,000, the deduction is reduced. To figure out what your reduced deduction is, you'll need to complete the Mortgage Insurance Premiums Deduction Worksheet in the instructions for Schedule A. But if your AGI is more than $109,000 -- the deduction is no longer available to you.
In all likelihood, you're paying property taxes on both homes -- and no restrictions exist on the deduction for state and local real estate taxes. As long as you're legally liable for the property tax payments on both homes, all of the money you pay in property taxes is fully deductible. When figuring out how much deduct, be sure to ignore any special charges assessed by local governments, such as for trash collection and improvements that increase the value of your home like the construction of a sidewalk in front of your house. These additional charges aren't treated as deductible property taxes under the tax code.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.