A second home can be a special place for family holidays, weekend getaways and maybe even a legacy to pass down. But it can also bring tax and estate planning headaches.
If you’re thinking of a second home as a legacy to pass down, “it’s important to make sure it’s sustainable both legally and financially,” Greg Hammond, CEO of Hammond Iles Wealth Advisors, told Homes.com.
From property taxes and mortgage interest deductions to capital gains and estate taxes, there’s a lot to consider. Some tax experts recommend November and December as ideal times to discuss tax planning for the current year and the upcoming year.
According to Hammond, setting up a trust can help avoid probate in multiple states and establish a clear framework for managing property across generations. Handing down the home isn’t enough — you also need to consider whether your heirs can afford to keep it.
Of course, every situation is unique. For advice tailored to your specific circumstances, be sure to consult a licensed tax professional or financial advisor.
Navigating tax considerations for second homes
Property taxes: According to Nicholas Ashjian, an advanced planner at Fidelity, property taxes on a second home may be tax-deductible but there are limits. Depending on your income, you could deduct up to $40,000 in state and local property taxes per tax return. But if you’re already using that deduction for your primary home, you won’t be able to claim it for the new one unless you plan to rent out the second property.
Mortgage interest: Mortgage interest deductions max out at $750,000 of total debt for taxpayers or $375,000 each for married couples filing separately. However, the total deductible debt limit depends on when the mortgage was originated:
- Before Dec. 15, 2017: You can deduct interest on up to $1 million of acquisition debt ($500,000 if married and filing separately).
- After Dec. 15, 2017: The cap drops to $750,000 ($375,000 if married and filing separately).
These limits apply per acquisition period, not cumulatively across all properties. So, if you have a mortgage from before 2017 and another from after, you apply the respective cap to each loan separately.
Capital gains: When you sell your primary home, married couples can exclude up to $500,000 in gains, while individuals or married couples filing separately can exclude up to $250,000. However, this exclusion doesn’t apply to second homes that haven’t been used as primary residences. If your second home has increased in value, you’ll owe capital gains tax on the difference between the purchase and sale price.
If you spend more than 181 days or half a year in your second home, it may qualify as your primary residence. To benefit from the capital gains exclusion, you must have lived in the house as your primary residence for at least two of the five years leading up to the sale.
Pro tip: “One way to avoid the capital gains on a second home, especially if you’re planning for retirement, is that you move into [the second home] as your primary residence for at least two years before you sell it,” Hammond told Homes.com. “Then it becomes your primary residence, and the gains may be exempt.”
Understanding the tax side of rental property income
Thinking about renting out your second home? That can change your tax situation. You may be able to claim income tax deductions on mortgage interest, property taxes, insurance premiums, utilities and other costs, as well as annual depreciation. However, the amount you can write off or deduct depends on how often you use the place yourself versus how frequently it is rented out.
Hammond advises putting serious thought into the purchase, just like you would with a long-term investment. Before committing, consider renting in the area to ensure it’s the right fit. Life events, such as moving closer to grandchildren or caring for aging parents, can alter your plans, so it’s wise to test things out before making a commitment.
According to IRS guidelines, a dwelling unit, like a house or apartment, is considered a residence if you use it for personal purposes for more than 14 days or 10% of the total days it's rented at the fair-market rate during the tax year. If it qualifies as a residence, your deductions may be limited.
Mortgage interest and property taxes: Unlike itemized deductions for a primary residence, there’s generally no cap on mortgage interest and property tax deductions for rental properties.
Operating and rental expenses: Rentals come with a range of deductible costs, including advertising, cleaning, property management fees, maintenance, utilities, and insurance. These can help offset your rental income.
Depreciation: The IRS allows you to deduct the wear and tear on the property over time, known as "depreciation." This is based on the home’s purchase price and any improvements. However, be aware that if you sell the rental property later, you may have to pay a tax on the depreciation you claimed (called "depreciation recapture"), which can be taxed at a rate of up to 25%.
Pro tip: “If you're a high-paid executive, for example, then depreciation may benefit you tax-wise because you have a higher income than when you may be retired and have a lower income," Hammond said. "But some people want to have similar income in retirement as they did in their working years, so I don’t typically see a large drop in income. In that case, you may choose not to depreciate [the second home] and use all the other expenses as deductions against the rental income. It also depends on how much you rent it."
There’s also a special rule that states if you rent the property for fewer than 15 days a year, you don’t need to report the rental income or deduct any related expenses.
| Rent your property for 14 days or fewer per year | Rent more than 14 days and use it personally for 14 days or fewer | If you rent more than 14 days but also use it personally for more than 14 days or personal use exceeds 10% of rental days | |
| Income tax due on rental revenue? | NO | YES | YES |
| Can you deduct relevant rental expenses? | NO | YES, ALL | YES, SOME |
Source: Fidelity
If you’re using the home for both personal and rental purposes, you’ll need to split the expenses based on the number of days it’s used for each purpose. For example, let's say renters stay there for 50 days and your family uses it for 150 days. That means rental time makes up 25% of the total days the home is used, so you’d be able to deduct 25% of eligible expenses. (See the chart below for a breakdown on a property with a $500,000 cost basis.)
| Rental usage | Personal usage | % of rental expenses that are deductible | Annual depreciation deduction over 27.5 years |
| 15 days | 60 days | 20% | $3,636 |
| 50 days | 150 days | 25% | $4,545 |
| 150 days | 50 days | 75% | $13,636 |
Note: Cost basis for depreciation includes property improvements but excludes land value. Deductible expenses: mortgage interest, property taxes, insurance, utilities, and other rental-related costs. Depreciation starts the year after purchase and continues until the property’s cost is fully recovered or it’s retired from service. Source: Fidelity
What a second home means for your estate plan
If you want your vacation home to stay with the family, it’s important to think about estate taxes. Depending on the size of your estate, a high-value vacation home could lead to significant estate taxes. It might also create a cash crunch if your heirs need to pay those taxes but don’t have enough liquid assets on hand.
Pro tip: Consider these questions: “Will they be able to afford to maintain the home? Will they be able to sustain it? The worst thing you want to do is spend decades creating memories in the home and anticipate passing it on, but at the time your children or grandchildren inherit it, they don't have the financial means to hold onto it, and they're forced to sell it,” Hammond said.
It’s worth noting that the estate and gift tax exemption is the amount of wealth an individual can pass on to heirs without triggering federal estate or gift taxes. As 2025 ends, the $13.99 million exemption for gift, estate, and generation-skipping taxes is set to drop to the pre-Tax Cuts and Jobs Act level of $5 million (plus inflation), due to the law’s sunset provision.
But the new One Big Beautiful Bill Act changes that. The federal estate tax exemption will be $15 million per person, and it'll continue to rise with inflation. That means married couples can pass on up to $30 million tax-free, effective Jan. 1, 2026.
One thing to keep in mind: gift and estate tax exemptions are linked. So, if someone gives more than the $19,000 annual gift tax exclusion in 2025, or $38,000 for spouses "splitting" gifts, those extra gifts count against what they can leave behind tax-free later on.
Hammond notes that future changes to the exemption could create opportunities for planning. For estates above the threshold, strategies like a qualified personal residence trust, or QPRT, may help reduce the taxable estate.
QPRTs allow you to continue living in your home for a set period, after which ownership automatically transfers to your beneficiaries.
Transferring a home into a QPRT counts as a gift for federal tax purposes, but the value of that gift is reduced because you retain the right to live in the home after the trust term ends. According to Fidelity, QPRTs can be effective in high-interest rate environments, which lowers the taxable value of the gift.
Please keep in mind that these strategies come with trade-offs and can become complicated. Consult with your tax advisor before taking any action.