This article was featured in the New Haven Register on April 14, 2019.
If you’re in a financial position to buy a second home, it can be a tempting idea: Purchase a lovely vacation home in ski country or in a place with palm trees where you can make memories, enjoy a slower pace of life and take in a completely different landscape.
If you can rent it out for most of the year, all the better, right?
Owning a second home can work, but there are pros and cons you need to consider before you become a dual homeowner.
First, the pros: It will be a home you can depend on for a regular getaway, and you can fix it up any way you’d like. It can double as a retirement home if desired. And real estate can sometimes be a good investment, although there’s no guarantee. Homes in desirable areas can appreciate, but you need to do your homework and understand the area you plan to buy.
In addition, there are tax benefits. However, the picture is different depending on whether you rent the property and for how long during the year.
If it’s purely a vacation home and you do not rent it out, you can write off all the interest you pay on up to $750,000 of debt secured by your two homes together (for loans as of Dec. 16, 2017), provided you itemize. (There are a number of complex rules surrounding taxation on second homes, and you should consider hiring a tax professional to help.) You can deduct state and local property taxes up to $10,000 per tax return.
If you rent the home out for more than 14 days out of the year, you can deduct rental expenses including mortgage interest, property taxes, insurance premiums, property management fees and more. If you rent it for fewer than 14 days you do not have to report the rental income, regardless of the amount, but you can’t deduct rental expenses. Renting for more than 14 days requires some complex tax calculations that a tax professional can help you with.
Now, the cons: Beware opening a second mortgage when you are still paying on your first mortgage. Many people think they can rent the property year-round to pay off the second mortgage until they are ready to use it for themselves. It’s a dangerous bet though, considering that you’ll be responsible for two mortgage payments if you lose your job, can’t find reliable renters, or there is high-cost damage to the second home.
Most likely you will need to hire a property manager, especially if your second home is hours away. You simply won’t have the time to travel to the property every time the air-conditioning system malfunctions or a leaky pipe wreaks havoc. Rental managers generally charge 10 to 20 percent of the monthly rent.
You’ll have to factor in the costs of maintenance (lawn care and house cleaning), utilities, travel and insurance. A beach house generally requires flood, storm and wind damage coverage.
Finally, you can run into a very basic conflict — if you want to recoup some of your costs by renting the home and you also want to enjoy it as a vacation getaway, you’ll want to be there during peak season, but then you’ll miss out on the highest rental income. But if you travel off-season well, why did you do this again?