Under the One Big Beautiful Bill Act of 2025, the mortgage interest deduction limits established by the Tax Cuts and Jobs Act were made permanent. For loans taken out after December 15, 2017, taxpayers may deduct interest on up to $750,000 of combined mortgage debt across primary and secondary residences. Mortgages originated prior to that date are grandfathered under the previous $1 million cap. Correctly applying these limits, and considering how the property is used, can make a meaningful difference in your tax outcome.
A financial advisor can also help you assess whether you’re maximizing your deductions and align your tax plan with your overall financial strategy.
How the Mortgage Interest Deduction Works
The mortgage interest deduction allows taxpayers to reduce their taxable income by deducting interest paid on mortgages secured by their qualified residences. With the updates from the One Big Beautiful Bill Act, this benefit remains permanent. For loans originated since December 15, 2017, taxpayers may deduct interest on up to $750,000 ($375,000 for those married filing separately) in combined mortgage debt across primary and second homes. Loans taken out before that date retain the previous limits: $1 million total, or $500,000 for married individuals filing separately.
To claim this deduction, homeowners must itemize their deductions on Schedule A of their 1040. This means foregoing the standard deduction. Interest qualifies only when the loan is secured by the residence, unless specific conditions are met. The deduction applies equally to your primary and secondary home, provided they meet IRS definitions of qualified residences.
IRS Rules for Second Homes
Under IRS guidance, a second home qualifies for the mortgage interest deduction if it isn’t primarily rented out and serves as a residence for personal use. You can still claim interest deductions even if you do not occupy the home full-time.
However, if the property is used part-time as a rental, you must occupy it for at least 14 days, or more than 10% of the time it’s rented, whichever is greater, to maintain its qualification as a second home. The rules apply even for homes under construction (up to 24 months) or timeshares.
Remember that if you own multiple secondary homes, only one property qualifies at a time. However, you may designate a different one mid-year under certain conditions.
Limits and Deduction Caps
The OBBBA permanent provisions maintain the $750,000 cap ($375,000 for those married filing separately) for new mortgage acquisitions. Pre‑2017 loans remain subject to the $1 million (or $500,000 married filing separately) limit. If your combined debt exceeds the cap, it’s necessary to prorate the deduction across the financed properties; interest isn’t pulled entirely from the loan with the highest rate.
Additionally, you can only deduct home equity loan interest if you use the funds to buy, build or substantially improve the home securing the loan, under new OBBBA exclusions.
What Happens If You Rent Out Your Second Home?
A secondary residence used occasionally as a rental becomes a mixed-use property, meaning you will split tax treatments between personal and business usage. For the residence to continue qualifying as a second home, you must personally use it for at least 14 days or more than 10% of rental days, whichever is greater.
When properly designated, you may deduct mortgage interest and property taxes like standard second-home rules. If your use is more rental than personal, your property is treated as a business asset. As a result, you must prorate and claim deductions—including mortgage interest—through Schedule E. If personal use is below IRS thresholds, the property is considered an investment, and passive loss limitations may apply.
Strategies to Maximize Your Tax Benefits
If your combined mortgage debt is close to or exceeds the deduction cap, consider these strategies:
- Time major payments. Make substantial mortgage payments or prepay property taxes in the same tax year to increase itemized deductions above the standard deduction.
- Leverage multiple deduction categories. Combine mortgage interest with allowable deductions such as medical expenses, state and local taxes (SALT), or investment interest to maximize total deductions.
- Track debt limits. When refinancing or taking on new mortgage debt, confirm how the new balance affects your interest deduction eligibility.
- Seek professional guidance. A financial advisor can help you plan for rate changes, tax bracket shifts, and optimal loan repayment timing.
Common Mistakes to Avoid
Homeowners frequently make costly tax errors when it comes to deducting mortgage interest on a second home. Watch out for these commonly made mistakes:
- Failing the personal-use test. This can inadvertently convert your second home into an investment property and disqualify mortgage interest deductions.
- Overlooking loan origin dates. This may trigger a reduction from the $1 million to the $750,000 cap.
- Including home equity loan interest improperly. You cannot take deductions if you do not use the loan to buy, build, or improve the property.
- Ignoring prorated deductions. The IRS does not allow selective deduction across properties.
- Forgetting to itemize. A Schedule A filing is necessary to claim mortgage interest on a second home .
Bottom Line
You can deduct mortgage interest on a second home, but under the One Big Beautiful Bill Act, the $750,000 cap for new mortgages is now permanent, while older loans remain subject to the $1 million limit. To qualify, you must itemize deductions and meet IRS requirements for residence use and total mortgage debt. Tracking how you use the property, timing payments strategically, and consulting a financial advisor can help you maximize tax savings and integrate your second-home costs into your broader financial plan.
Financial Planning Tips for Homeowners
- A financial advisor can help you account for IRS rules, track property use and structure payments to maximize deductions. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to figure out how much you can spend on a home, SmartAsset’s affordability calculator can help you estimate how much house you can afford based on several key inputs.
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