Home, Sweet Tax Break

If you own your home, you're privy to some of the biggest tax breaks written into the code -- and there's more to it than just being able to write off the interest paid on your mortgage. The following is an overview of some of the most important tax considerations in owning your home, as well as a few limitations and caveats.

Second (and third) homes. You're able to deduct the interest on a loan used to purchase or construct a second home as well. And the tax code's definition of a "second residence" is pretty generous -- essentially any establishment with a toilet, sleeping and kitchen facilities will qualify. That means houseboats and Winnebagos as well as a second house or condominium.

If you rent out your second home, there are a few things to keep in mind. If you rent the home for more than 14 days, you lose the ability to deduct the mortgage interest. The definition of "rent," in this case, is pretty strict -- when counting rental days, you must include days that the home was held out for rental or listed for resale.

The interest on a loan used to purchase a third residence isn't deductible as an acquisition loan, but it could be deductible if the loan goes to purchasing investment or business property.

Limits on loan size. Loans that are used to buy, construct or improve a first or second home are called home acquisition loans. Homeowners are allowed to deduct the interest on such loans as an itemized deduction on Schedule A. There is a limitation, though, for loans taken out after Oct. 13, 1987: Only the interest on up to $1 million of such debt qualifies for mortgage interest deduction. Loans obtained prior to Oct. 14, 1987, are exempt from the $1 million limit.