Personal Losses and Expenses

• Section 262 of the Internal Revenue Code excludes personal, family and living expenses from being deductible for federal tax purposes. IRC Section 165(c) specifically excludes a deduction for losses realized from the sale of personal assets. A personal asset is one that is not held for investment or business purposes. Therefore, the loss realized from a sale of a secondary residence is generally not deductible for federal tax purposes. Many taxpayers are surprised by this rule because a gain from the sale of a personal asset might be included in taxable income as a capital gain.
  
  

Losses From Investment Property

• A loss from the sale of investment property may be deductible for federal tax purposes. Property held for investment purposes is property that you purchased with the intent of holding it as an investment. A common example is a house that you purchase to fix up and sell later at a gain, which is known as flipping. Another example of an investment property is one which you purchased to rent to tenants. A secondary home may also be treated as an investment property if you rent the property to tenants and intend to hold it as investment property. However, whether the property qualifies as an investment will depend upon the facts and circumstances of your situation. The Internal Revenue Service may challenge your classification as investment property if it believes you really were holding the property as a personal residence and that you rented it just to change its classification to investment property.
  
  

Mortgage Interest Expenses

• The Internal Revenue Code allows an itemized deduction for mortgage interest. The qualified mortgage interest is deducted on Schedule A of federal Form 1040 if you decide to itemize your deductions instead of taking the standard deduction. The amount of mortgage interest you can deduct is subject to various limits, such as a $500,000 principal balance for single taxpayers and $1 million for married taxpayers in 2011. The good news is that mortgage interest on a secondary home is deductible as long as the mortgage meets the requirements put forth by the IRS.
  
  

Property Tax Deductions

• The Internal Revenue Code also allows an itemized deduction for property taxes. The amount of property tax is deducted on Schedule A of federal Form 1040 if you decide to itemize your deductions instead of taking the standard deduction. The internal Revenue Code and the Internal Revenue Service have several rules on what constitutes a deductible real estate tax for federal purposes. As a general rule, taxes that are uniformly allocated to properties in a jurisdiction based upon their assessed value are deductible for federal tax purposes. Therefore, the property taxes you incur and pay in regards to your secondary residence may be deductible.