Is the Vacation Home a Qualified Residence?
To take a mortgage interest deduction for a vacation home, the home must be a qualified residence, which means that it must have a permanent toilet and facilities for sleeping and cooking. This is usually not a problem for a cabin in the mountains are a condo at the beach.
Is this Your Only Second Home?
You can only take a mortgage interest deduction for your principal residence and one second home. If you have multiple vacation homes that qualify under the first rule above, you can choose which home to designate as your second home for tax purposes each year. Choose the vacation home with the largest total deductions for real estate tax and mortgage interest.
Is the Loan Secured by the Property? Are you Responsible?
The loan must be secured by the property, and your name must appear on the loan documents as the person responsible for repaying the loan.
You can deduct the points that you pay to acquire or refinance a vacation home, but you must deduct them over the life of the mortgage, rather than in the year you pay the points.
If you rent out your vacation home, then additional rules may apply.
For all real estate purchases, it is best to consult with your CPA, financial advisor or tax preparer.