6 Questions to Ask Before Buying a Second Home

Thinking about buying a second home or vacation home? Here are a few things you should know.

What is the difference between a second/vacation home and vacation rental? A second/vacation home is a residence that is occupied by its owners but it is not their primary residence. The second home can be used as a vacation spot, weekend residence or business residence (for example having an apartment in the city that is used during the week). A vacation rental is purchased to generate income.

There are some people who elect a hybrid model, a vacation rental that is also used by the owner often. For example: a mountain cabin where you and your family spend 60 days a year and the remainder of the year (or let’s say 180 days) it is rented out using a vacation rental agency. How does this hybrid model break down for tax purposes? Take the ratio of days rented out by total days used (180/240). The percentage that is calculated will then be used to calculate the percentage of rental vs. personal use for tax purposes.

Before buying a second home, there are many factors to consider.

Before Buying a Second Home or Vacation Rental, Answer These Questions

  1. Are you looking at the property to create income or for enjoyment?

  2. What is your long term goal for the property?

  3. Could the property end up becoming a primary residence?

  4. Do the numbers work for you now and in the long term?

  5. Are you looking for additional tax benefits?

  6. How far away is the home from your primary residence?

If your answer to the first question was “to create income”, focus on buying a vacation rental in a location where it is the best to create steady income all year. An example would be a condo by a ski resort that also has summer activities so there isn’t just one high season.

If you said enjoyment, make sure the vacation home you choose is someplace that you can see yourself and family getting to on a regular basis to take full advantage. If it is too far away from your primary residence or not one of your favorite places, it may end up being a bad investment for you.

It is important to know what your long term goal is for the property, but also be willing to be adaptable. Our goals sometimes have to be re-evaluated as our circumstances change over time. Also, make sure the numbers work as a second home (can you afford two loan payments without stress?) and, if you’ll be renting the property, that it will rent at a minimum of breakeven.

If you are looking for tax benefits, the hybrid method of having a second home can create a nice tax benefit without the restriction of only 14 days of usage to have the property qualify as an “investment” property.

Once you have a clear answer to these 6 questions it is time to consult your tax advisor, realtor and mortgage lender.

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