Buying a Vacation Getaway: Second Home or Investment Property?

Posted by Julian Yates on Friday, August 8th, 2014 at 3:08pm.

Florida is known the world over as a vacation destination, and Sarasota, with its beautiful beaches, culture, and tropical lifestyle is a prime hotspot in the state. Sarasota is also a great place to own vacation property. If you're considering buying a second home to use either as a vacation getaway or an investment property, you probably have a lot of questions regarding loans and taxes and how these change with the purpose of the home. To help you, here is a quick primer explaining the difference between the two, so you can make an educated decision before you buy.


Make sure it's legal

If there is even a chance you'll want to rent out the property you are about to purchase, make sure there are no policies, codes, or restrictions in place to keep you from doing so. This is quite often the case with condominiums, gated communities, and deed-restricted neighborhoods. Check with the condo association or homeowner's association before buying and make sure you have it in writing that you have the right to rent out your property. 


Second home, dual use property, or investment property?
If you plan to purchase a vacation home only for personal use and don't plan to rent it out, then it would be considered a second home. For many people, a getaway for more than a few weeks per year is difficult, making it hard to justify an additional mortgage and associated property taxes. Many second homes are rented out either part or all of the time the owner is not using it. In this case it is considered an investment property while it is rented, and a second home while it is being used by the owners. This sort of dual use property is very common in well-known vacation areas like Sarasota. The last option is of course that you will only rent out the home, in which case it is strictly an investment property.


Defraying the costs of a second home

As mentioned above, if you are only going to use the home a few weeks per year, this can be an expensive undertaking as you will have the same basic expenses as your first home; the property will sit vacant for long periods of time, leaving it vulnerable to a host of calamities. One way to defray these costs is to rent the home out for 14 days or fewer a year. No matter how much you pocket in rental costs, the money is tax-free as long as you don't go over the two week maximum. Anything beyond that and the home is considered a rental property, so you will have to report all rental income to the IRS.


Have your cake and eat it too

If you decide to use your vacation home as a rental, the IRS will allocate between the two uses on a percentage basis. If you stayed in the home for two weeks and rented it out for 18 weeks, it would be considered an investment (rental) property for 90% of the time and taxed accordingly. The other 10% would be taxed as if it were simply a second home. The advantage here is that you would also be able to write off your costs and expenses on this same percentage basis.


An investment property is a business

Because an investment property is considered a business, you can deduct practically all of the expenses you incur from owning and managing the property. You can also claim a loss against another source of income. If your adjusted gross income is less than $100,000, than this could be as high as $25,000 a year. You can also claim this deduction if you are actively managing the property as a full-time career.


A final consideration

Because the IRS no longer allows you to deduct your primary mortgage from taxes when you use a second mortgage to purchase an investment property, the wisest choice for now is to pay cash for that second home.


Owning a second home can be either a terrible financial burden or a fantastic investment. Knowing how much you intend to use the property, how you will pay for it, and how much you want to be involved with managing it are the primary things to consider before buying the vacation getaway you've always dreamed of.


Sarasota Area Real Estate Specialist

Leave a Comment