Legal   |   ADV   |   Privacy   |   CRS

Should You Buy a Vacation Home?

With summertime almost here, you might be thinking about what you want to do for your summer vacation. This is especially true now that the pandemic appears to be easing, with restaurants and entertainment reopening and masking and social distancing requirements being eased.

Depending on your vacation style, you might even be thinking about buying a vacation home. Now could be an especially good time to buy a vacation home from a financial standpoint since mortgage interest rates remain near historic lows.

Weighing the Pros and Cons

Buying a vacation home is obviously a big commitment, from both a financial and lifestyle perspective. So what are some of the factors you should think about as you decide whether this is a wise move for you and your family?

The first factor to consider is the cost of owning the home. Depending on the location, a vacation home could cost as much money as a primary residence, if not more. There will also be other costs such as insurance, property taxes, utilities, maintenance and repairs, and association fees. When all is said and done, the cost of owning a vacation home could easily meet or exceed the cost of owning your primary residence.

Your vacation preferences and lifestyle are another important factor to consider. Buying a vacation home might limit your vacation options in the future since you’ll probably want to spend most of your vacation time at the home. If you like to go to a variety of different places when you vacation, then buying a vacation home may not be the best option for your family.

This might be a different story if you have a favorite vacation destination you like to visit year after year. Buying a home in this area would guarantee that you have your own place to vacation in every year at a fixed cost. You can also leave your personal belongings in the home, like snow skiing equipment or beach and fishing gear. This can make travelling to and from the home much easier.

An additional benefit of having a vacation home is that you can customize, accessorize and decorate it however you like. You won’t have to worry about spending a week or longer in someone else’s home or condo with dated furniture and appliances and uncomfortable beds. In this way, you can make your vacation home really feel like “home sweet home.”

If you think there’s a chance you might want to live in your favorite vacation spot full time one day, like when you retire, this is another reason to possibly buy a vacation home. Real estate often appreciates over time, especially the long term, like 10 to 20 years or longer. So holding onto a vacation home for the long term as a future full-time residence could end up being a smart financial move down the road.

Rentals and Tax Implications

Depending on how much time you plan to spend in the vacation home, you could possibly offset some of the ownership costs by renting it out while you’re not there. According to a survey conducted by VRBO, 42% of second-home buyers purchase the home mainly to use as a short-term rental. Keep in mind, however, that there are costs involved in renting out a vacation home, including marketing the home. Also, some people simply don’t like the thought of others living in their home as tenants. 

Renting a vacation home could also have tax implications. If you rent the home for more than two weeks a year, you must report the rental income on your tax return. Meanwhile, if you live in the home at least two weeks a year or for 10% of the days it’s rented out, the home is considered to be a secondary residence, not an investment property, for income tax purposes.

Here’s why that’s important: You can deduct the interest paid on up to $750,000 of debt assumed on a primary residence, including a vacation home, but not on an investment property. The same goes for property taxes. However, you won’t be able to exclude up to $250,000 on capital gains (or $500,000 if you’re married) when you sell a vacation home like you can with a primary residence.

Finally, you should make sure that you’re even allowed to rent out your vacation home before making a decision. Some condo and homeowners associations place restrictions on property rentals, such as not allowing weekly rentals or requiring that you own a property for at least one year before you can rent it. If you will rely on rental income to be able to afford your vacation home, this is something you need to find out before buying it.

Consider All the Factors

Be sure to carefully consider these and other factors and weigh all the pros and cons before making a final decision about buying a vacation home. Give us a call if you have any questions or would like to talk it through in detail.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.