Things to Consider Before Buying a Second Home or Vacation Home

All of us dream of having a vacation home, preferably near a lake or a beach where we can unwind during our downtime or to use during our retirement. However, there are things to consider when deciding to purchase a second home, not least of which is your finances.

Here are some of the important things to consider when buying your vacation or second home:

1. Reduce your exposure

Many real estate agents or financial managers may tell you not to put more than 40% of your investments into real estate. Remember when the US housing bubble burst in 2008? Many homeowners were left with an underwater mortgage. Thousands were rendered homeless as a result because they were essentially paying more than the market value of their houses. So when you add your primary residence with your vacation home, you may want to consider if you still have enough money in the bank. Meanwhile, you also have to look at maintenance or renovation expenses to be sure your investment will be worthwhile.

2. Banks are stricter on the second home

When you apply for a mortgage for your second home, you will find that banks will be more stringent. This is because they need to determine if you can afford another mortgage on your budget, and also whether you are going to have some extra income by renting out your property.

3. Thinking of renting it out?

The IRS is quite specific on the number of days that you can rent out a vacation home without declaring any income. The magic number is 14. Provided you rent the property for less than 14 days, the income is all yours. No matter how much it is, you don’t have to share it with the IRS, and you don’t have to declare it on your tax return. However, if the rental period exceeds 14 days, then the IRS will step in, then you have to report all the income you get from rent. Now if you are only using the vacation home for 14 days a year, you can apply for deductions for as much as $25,000 because the house is now considered a rental property.

4. Tax write-offs

Before you retire, you can get as much as $500,000 in tax-free profits if you sell your primary residence after you have already made your second home your primary residence. The rule is that you must have lived in the vacation home for at least two years. For single homeowners, the amount of tax-free profits they can get is $250,000. The computation can get complicated, so better consult a financing expert first. Most realtors, however, can give you the broad brushstrokes if you are interested.

As you can see, buying a vacation home can be complicated, but it’s not impossible. If you get the right price and location, a second residence can be a good investment. Just make sure you weigh the pros and cons with your realtor before you decide to move forward with this major step.