Important points:
Purchasing a vacation home costs more than the purchase price, including taxes, insurance, maintenance fees, and travel expenses. Choose a location that you will actually enjoy and have long-term resale potential. While they offer rental income and tax benefits, vacation homes also come with additional risks and responsibilities.
Looking to purchase a vacation home in Dewey Beach, Delaware, a ski chalet in Colorado, or a family home in Frisco, Colorado? Second homes offer a reliable getaway and a place to make lasting memories. But while it may sound appealing, buying a vacation home requires additional costs, maintenance costs, and planning. This guide will help you decide if you’re ready to take that step.
What does buying a vacation home actually mean?
A vacation home is a second property that is different from a primary residence and is used for leisure rather than daily living. Unlike investment properties, which are purchased primarily to generate income, vacation homes are often purchased primarily for personal enjoyment, with the potential for rental income.
People buy these homes for various reasons. Some people want a personal retreat to escape to for the weekend, while others see it as a way to host family gatherings or rent it out when not in use. For many people, it’s also a long-term plan, eventually leading to building a retirement home in their favorite location.
>>Read: Top 10 U.S. towns where vacation homes dominate the market
1. Financial considerations before purchasing a vacation home
Before purchasing a vacation home, it’s important to look beyond the list price and understand the true cost of ownership. The main costs to keep in mind are:
Down payments and financing: Lenders often consider vacation homes to be a higher risk than primary homes, so they often require higher down payments, typically 10 to 20 percent or more. Your interest rate may also be slightly higher, which will affect your monthly payments. Ongoing costs: Property taxes, homeowners insurance, utilities, and HOA fees can be high in popular vacation spots. Depending on your area, you may need special coverage, such as flood insurance or hurricane insurance, which can be costly. Maintenance and Repairs: Your property needs attention even when you are not there. Think about cleaning, landscaping, routine maintenance, and the occasional unexpected repair. Hiring a property manager can be effective, but costly. Transportation: Transportation to and from the villa is not free. Whether you’re traveling by car or by plane, transportation costs add up over time and should be included as part of your budget.
2. Location considerations
Where you buy is just as important as what you buy. With the right location, you can enjoy your vacation home now and make a smart investment later. The main factors to consider are:
Accessibility and amenities: Choose spots that are easily accessible and have features you’ll actually use, such as beaches, ski slopes, restaurants, and shopping. If your home is too remote, it may be difficult to enjoy it on a regular basis. Travel Convenience: If you plan to visit often, consider proximity to airports, highways, and major transportation. Long or complicated travel routes can make your vacation less appealing over time. Resale and Market Trends: Vacation homes are real estate, so check local real estate values and market demand. When you buy in a stable or growing area, your home is more likely to maintain its value when you decide to sell.
3. Lifestyle considerations
A vacation home should fit your lifestyle, but not complicate it. Before you commit, think about how it will actually be used.
Visit frequency: Please be honest about how often you visit. For properties that are only used a few weekends a year, the cost may not be worth it. Spontaneity and planning: Vacation homes make vacationing easier, but they also lock you into one location. Instead, ask yourself if you prefer the flexibility of exploring new places. Ownership vs. Renting: Renting a vacation home may be cheaper and more versatile. Weigh whether long-term ownership is worth the money compared to booking a one-time rental.
4. Rental considerations
Many buyers offset costs by Airbnbing or renting out their vacation home, but that comes with tradeoffs.
Advantages: Rental income can cover the mortgage, taxes, and maintenance costs. It can also be profitable in busy markets. Cons: Frequent move-ins can be draining, and some cities limit or regulate short-term rentals. Management options: Manage reservations and maintenance yourself or hire a property manager. Outsourcing saves time but reduces revenue.
5. Risks associated with purchasing a vacation home
Owning a second home comes with its own risks, especially if it’s vacant.
Vacancy Concerns: Homes that are left vacant for long periods of time are more likely to be damaged by storms, theft, or even without your knowledge. Insurance Requirements: Second homes often require additional coverage, such as flood and hurricane insurance, which increases costs. Seasonal maintenance: Snow removal, landscaping, and storm preparation may be required even when you’re not there, requiring additional coordination and expense.
6. Possible tax implications when owning a vacation home
Taxes on vacation homes vary depending on how the property is used. If you rent a property for more than 14 days a year and your personal use is less than 14 days or 10% of the total rental days, the IRS considers the property to be rental property. In this case, the rent collected will be counted as taxable income.
The benefit is that, depending on your situation and current IRS rules, you may be able to deduct many of the costs of owning and operating a home, including property taxes, insurance, mortgage interest, maintenance and management fees. These deductions help offset debt against rental income.
The rules can be complex, so we recommend consulting a tax professional before making a purchase. These will help you understand what to expect and how to structure your use of the property so you don’t run into any surprises later.
7. Possible tax reduction by owning a vacation home
Owning a vacation home can provide you with tax benefits depending on how you use the property.
Property taxes: You can deduct property taxes on your second home, but the deduction is capped at $10,000 per tax return ($5,000 if married filing separately). Mortgage Interest (Personal Use): If your vacation home is treated as a vacation home, you may be able to deduct mortgage interest on up to $750,000 in total qualifying mortgage loans ($375,000 if married filing separately). Mortgage Interest (Rental Use): If your home is rented out for more than 14 days per year and meets IRS rental property rules, you may be able to deduct mortgage interest, insurance, and property taxes from your rental income.
It is important to be clear about how the property will be used, as you cannot claim personal deductions and rent deductions at the same time. Tax laws are complex and change frequently. Always check the latest IRS guidance or consult a qualified tax professional for advice specific to your situation.
8. Are you ready to buy a vacation home?
Not everyone is ready to take on the responsibility of a vacation home. Here’s how to know if you are.
Financial stability: You need solid savings, a solid emergency fund, and the ability to comfortably support both homes. Intended use: Determine whether the property is primarily for personal vacation, rental income, or long-term retirement planning. Responsibility level: Consider whether you are willing to take on maintenance and management or whether you will need to hire help. Future Vision: Think long term. A vacation home can be used as a family retreat, retirement plan, or legacy, but it requires a commitment.
Alternatives to buying a vacation home
If you’re not sure if full ownership is right for you, there are other ways to enjoy a vacation home without the same level of commitment.
Vacation Rentals or Timeshares: Purchasing a short-term rental or timeshare allows you to enjoy real estate without the long-term costs, maintenance fees, and risks. Fractional ownership or joint purchasing: Sharing ownership with family or friends can reduce expenses, but requires a clear agreement on schedules and responsibilities. Test drive location: Spend some time in your desired area before purchasing. Rent it for a season to see if it’s right for you.
Considering these options first can save you money and give you more confidence in deciding when or if you’re ready to buy.
Conclusion: Is a villa right for you?
Buying a vacation home means considering the balance between cost, maintenance and lifestyle. If you are financially prepared and have a clear plan, it can be a worthwhile investment in memories and future value. If not, renting or fractional ownership may be a wise choice.
