4 Financial Advantages of Vacation Homes

Thursday, February 1st, 2018

Vacation homes are a great place that you can spend some time. But did you also know that they are great investments? Below are four financial reasons to consider buying your own vacation home.

1. Tax Deductions

When it comes to tax breaks, the largest tax break is a home. When you have a vacation home, it qualifies for a lot of, and sometimes all the deductions that your regular home does. If you’re spending a minimum of 14 days per year in the vacation home, you’ll be able to deduct the interest that you’re paying in the mortgage just like you do with your other house. This means that you can deduct as much as $1 million total in debt for mortgages. So if you owe $500k on each of the, you’ll be able to write off all of the payments for interest.

If you owe $1,200K on the two of them, you will be able to write off that interest on $1 million but that last $200K isn’t eligible. If you are the owner of three homes, you only can write off the debt on just two of them. However, you’ll be able to choose the two that you want to write off.

This applies even if you have a home that is in another country. There will be more paperwork that you have to do but you’ll still be able to write it off.

It’s also possible to write off property taxes just like the primary residence. If you have a home that is out of the country, you may be able to deduct foreign taxes by the IRS. However, you’ll have to ask the tax preparer.

2. New Income Source

Because it’s your vacation home, it’s possible to rent the house when you aren’t staying there. If you have a home that is in a great location, you may even make ample money so that the house is paying for itself.

When you rent it, it won’t mean you’ll be forfeiting all your tax breaks. There are a lot of very specific rules regarding this from the IRS, but there’s a few main points below:

It’s not necessary to report your rental income when doing income taxes when the house is rented for under 15 days per years. However, if you don’t report the income you’re unable to deduct any expenses that are rental related on taxes.

If it’s being rented for 15+ days each year, it’s necessary to report that income

If you’re reporting your income, you’re able to deduct your interest and costs that are related to the rental as business expenses through the time that the vacation home is earning income. Then you’ll be able to deduct that interest as your personal deduction during the time you live there.

One thing that you should remember is that it’s hard to be a landlord. You’re going to need a tax advisor or accountant, to help with coping with your financial issues.

3. It can Help Build Equity

Because the majority of second homes will be find where you’ll want to live rather than where you’ve got to live due to commitments like family or work, a lot of people are going to keep their vacation home longer than a primary residence. This is going to give you a lot more time for paying down your home and watching the home appreciate.

Although property values often will fluctuate in some of the markets, the price of just about any property or home will likely go up as time passes. This means your vacation home is going to be a very solid investment.

4. Reduce Retirement Expenses

When you plan ahead and buy your own vacation home that can become your main residence at retirement it can help you save a lot of money. When you start early, you’ll build equity and reduce the mortgage debt when it comes to your retirement and current residences. When retirement comes and you sell the home you currently have may even give you enough for paying off both of the mortgages

Another bonus is unless you’re making a profit of over $250K on your home’s sale or $500K for a married couple, you don’t have to worry about the tax known as capital gains. Since your vacation home’s going to be owned for you for a while, you’re also going to know what the taxes, maintenance costs and upkeep are going to be. There won’t be many surprises.

It’s important to know that it can be a little more expensive and hard to buy.

Second homes are riskier investments when it comes to lenders since they’ll know when someone finds themselves in some financial trouble they’re going to do everything possible to hold onto their main home. This is true even if it means they have to lose the vacation home.

This is why, based on your financial reserves and credit score, the majority of lenders are going to require that you put 20% – 40% down and they’ll charge anywhere from .25 to 1 point more interest.

If you’re able to buy your vacation house with under 20% down, you’re going to need some insurance known as private mortgage. This is going to be higher when it’s for a second house when compared with the first one.

These are four great reasons that people buy vacation homes. Not only do they have great places to go spend their vacation, but they also have a second income. And when they are ready to retire, they have a place to go.

Visiting Marco Island?

We offer a huge selection of the Island’s finest vacation rentals in every price range. Whether you want to stay a week, several weeks, or even months, we can match you with a home or condo ideally suited to your needs. Contact our Marco office today.