Your Second Home: For Vacation, Investment or Both?

Have you ever gone on vacation and thought, I could see myself purchasing a property here?

Maybe it's somewhere you return to year after year. Maybe you'd like a weekend getaway that's close enough to enjoy more often. Or perhaps you've been thinking about purchasing another property that you can enjoy personally while also generating rental income when you aren't there.

Whatever sparked the idea, purchasing a second home can be exciting—but there are some important things to consider before you buy.

First, what do you want the property to do for you?

If it's primarily a vacation home, think about how often you'll realistically use it. Is it close enough for a quick getaway, or will every visit involve airfare and additional travel expenses? Who will take care of the property when you aren't there?

The purchase price isn't the only expense. Consider property taxes, insurance, utilities, association fees, maintenance, furnishings, travel expenses and the cost of maintaining a second property when you aren't there.

What if you'd like the property to generate income?

That's where there are additional considerations.

Before you purchase, find out whether rentals are permitted. Are there local restrictions on short-term rentals? Does the condominium or homeowners association allow them? Are there limits on the number of days the property can be rented? Will you manage it yourself, or will you need a property management company to handle reservations, maintenance and guests?

Taxes are another reason the intended use of the property matters.

If you rent the property, that income may have to be reported on your federal income tax return. Depending on how the property is used, certain rental expenses and depreciation may also be deductible.

There is also an important federal rule for limited rentals. Generally, if you rent a residence for fewer than 15 days during the year, the rental income isn't reported, although rental expenses aren't deducted either.

Selling a second home can have different tax consequences as well. A second home generally doesn't automatically qualify for the same capital-gains exclusion that may be available when selling a qualifying primary residence. If you've used the property as a rental and claimed depreciation, that can also affect the taxes due when you eventually sell.

Depending on where the property is located, short-term rentals may also be subject to state or local lodging, occupancy or similar taxes.

Your lender, insurance professional and tax advisor should be part of the process before you purchase. Your intended use—personal, rental or a combination of the two—can affect financing requirements, insurance coverage and federal, state and local tax treatment.

And it doesn't necessarily have to be one or the other.

You may want a property that you and your family can enjoy throughout the year while renting it when you aren't there. Or perhaps you're considering a second home that could eventually become your primary residence.

That's why I encourage buyers to look beyond the excitement of finding a beautiful property and ask a bigger question:

Does this purchase make sense for my lifestyle, my finances and my long-term real estate goals?

As a Resort & Second-Home Property Specialist (RSPS), I have specialized training in the unique considerations involved in resort, recreational, vacation and second-home real estate. I can help buyers understand the questions they should be asking and the factors they should be considering before making a purchase.

If you've been considering a second home, start with its purpose:

Vacation, investment or both?

Once you've answered that question, you're in a much better position to determine what type of property is right for you.

Author: Ria Harris, SRES, ACP, RSPS

Licensed Real Estate Managing Broker – Illinois & Indiana

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