You can deduct the cost of the home plus improvements you made to it. The loan payoff is of no consequence, the cost (basis) of the home is the purchase price plus improvements.
You will enter it in TurboTax as a sale of investment as follows:
1. Find the "Income and Expenses" menu option in your TurboTax program
2. Find "Investment Income" in the list of categories
3. Click on "Stocks, Mutual Funds, Bonds and Other"
4. Work through the program to find "Choose the type of Investment you Sold"
5. Choose the "Second Home" option in the list of investments
6. Enter the information requested about your sale (date purchased, sale amount, cost, etc)
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Yes
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