Purchasing two homes requires careful tax planning. For a primary residence, you can deduct mortgage interest (up to $750,000 for loans taken after December 15, 2017) and property taxes (capped at $10,000 annually under the Tax Cuts and Jobs Act of 2017). A second home does not qualify for the primary residence exclusion but may still deduct mortgage interest and property taxes if itemizing. Capital gains from selling a primary home are tax-exempt if owned for two years (up to $250,000 single, $500,000 joint). The second home’s sale proceeds are taxed as capital gains unless it was a primary residence for at least two years post-sale. Depreciation can offset rental income for investment properties but must be recaptured at sale (25% rate). Property taxes, insurance, and maintenance costs are deductible for rental properties.

The IRS allows mortgage interest deductions to incentivize homeownership, but limits prevent excessive tax breaks. In 2022, 68% of U.S. homeowners itemized deductions, primarily for mortgage interest and property taxes (National Association of Realtors). The $750,000 mortgage cap applies to new loans, while existing loans retain previous limits. Depreciation rules, set by IRS Publication 527, ensure investment properties offset rental income, reducing taxable profit. For example, a $500,000 rental property with $50,000 annual depreciation reduces taxable income by that amount while holding the property. Selling a second home typically incurs capital gains tax (15-20%) unless it qualifies as a primary residence. In 2021, capital gains accounted for 89% of tax revenue from real estate transactions (U.S. Treasury). Itemizing is only beneficial if deductions exceed the standard deduction ($13,850 single, $27,700 joint in 2023). Rental property expenses, including depreciation, must be tracked meticulously to avoid IRS disputes.

The U.S. tax code treats primary and secondary residences differently to balance equity and revenue needs. Primary residences receive preferential treatment to encourage homeownership, while investment properties are taxed to fund public services. Data from the IRS shows that 55% of second homes are vacation rentals, contributing $100 billion annually to local economies (U.S. Travel Association). However, owners must allocate expenses between personal and rental use, which the IRS audits in 12% of audits involving real estate (Tax Foundation). Proper documentation and strategic planning, such as converting a second home to a primary residence before selling, can minimize liabilities. For instance, living in a vacation home for 18 months may allow it to qualify for the primary residence exclusion. Tax laws are complex, so consulting a CPA or tax attorney is advisable to navigate dual homeownership scenarios effectively.