You can live mortgage-free in retirement, even if you decide to sell your house and buy that home near a lake that you've always dreamed of.

That's because couples who sell their primary home can pocket up to $500,000 of profit tax-free (it's $250,000 for individuals).

Or you could use the proceeds as a down payment on a new home — or even two new homes, in winter and summer destinations.

Mortgage rates for a second home should be the same as for a primary residence, says Gibran Nicholas, chairman of the Certified Mortgage Planning Specialist Institute, in Ann Arbor, Mich. But you'll generally want to put 20 percent or more down on your retirement home to get the best rate and avoid paying private mortgage insurance.

If that vacation home eventually becomes your primary home, you can claim up to $500,000 of tax-free profits when you sell it. There is no limit to how many times you can take advantage of the tax-free-profit rule, as long as you live in the house full-time at least two of the five years prior to the sale.

If you're years away from moving into your new home on a full-time basis, consider whether renting it out would cover some of your costs, such as taxes, utilities, insurance and maintenance expenses. But don't count on the rent covering your biggest expense of all: your mortgage.

Steve and Sue Davidson of chilly Alexandria, Minn., defray some of the cost of their second home in Sun City West, a retirement community near Phoenix, by renting it. The Davidsons, who bought the two-bedroom home for just under $170,000 in 2004, rent it out for three months each winter for $1,950 a month.

The rent covers their annual property-tax bill and utility costs as well as the 11 percent they pay their property manager, with a little left over, says Steve. Note that in some areas, real estate taxes are higher on non-owner-occupied dwellings.

Aside from added income, renting out your home has tax benefits. Under IRS rules, you can deduct maintenance expenses for a rental house and still vacation there for as many as 14 days a year or 10 percent of the amount of time it is rented, whichever is longer.

If your personal use of your second home exceeds that, you'll lose the tax advantages of an investment property, including the ability to deduct losses, but you can still write off mortgage interest and can collect up to 14 days of rental income tax-free.

Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to