Financing a Second Home

Sidestep potential problems by planning for tax and insurance issues.

HWFW1-S08_NJshore

Related To:

If you're thinking of buying a second home, be sure to crunch the numbers first. Here are some tips to make sure your dream vacation getaway doesn’t become your worst financial nightmare.

If you want to avoid higher interest rates and bigger down payments often required in buying a second home, try leveraging the equity in your first home or diverting pre-tax funds from an IRA.

  • Consider working with an experienced mortgage broker, rather than one lender.
  • Calculate the insurance costs. Many desirable areas have a higher risk of natural hazards such as hurricanes, floods or forest fires. Get several insurance quotes before making an offer.
  • Set aside about 2 percent of the home's value each year for maintenance costs. For professionally managed rental properties, expect the management company to pocket anywhere from 20 percent to 50 percent of the rental income.
  • If you can't afford your dream vacation home, start with a more affordable and utilitarian rental property close to home. You can build equity and trade it for that dream place in the future.
  • Look for a place that can serve as a part-time rental property. Find something you like that you can rent out when you can't use it.

Learn about local zoning laws, construction standards, development plans and other factors that may adversely affect the long-term investment value of the home you plan to purchase.

Don't forget the tax man. Like your primary residence, mortgage interest and property taxes on a second home can be claimed as Schedule A deductions. But keep in mind the ways second homes are taxed when you use them as rental properties: 

  • Homes rented out for fewer than 15 days during a given year are considered personal-use property by the IRS. Owners are not required to report the rental fees as income, and no other deductions (aside from mortgage interest and property taxes) are allowed.
  • If you rent out your home for 15 days or more during the year, you have to report all rental receipts to the IRS as income. Operating expenses such as utilities, repairs, insurance and management fees can be deducted against the rental income, with deductions allocated according to the number of days the property was rented versus the number of days it was reserved for personal use. Travel expenses related to maintaining a rental property may be deducted in some circumstances, but no travel deductions are allowed for properties rented out for fewer than 15 days.
  • Unlike your primary residence, all profits from the sale of a second home will be taxed as a capital gain. But there may be a loophole. Move into your vacation home and treat it as your primary residence for at least two years before selling, and you may get around the capital-gains tax requirement.
  • For more information and referrals to certified tax advisers, visit www.natptax.com.

Next Up

Did I Accept a Bad Offer on My Home?

Worried you accepted a bad offer for your home? Let real estate expert soothe your fears.

Want to Own a HGTV Home? Now’s Your Chance.

Ready to make a move? Check out these homes from HGTV shows that went on the market, or recently sold, including houses from Rock the Block, Home Town and more.

Deciding How to Move

You're moving! Now it's time to decide how you're going to get there. Before you start filling boxes with your belongings, consider which moving options work best for you.

HGTV Obsessed Episode 6: Dan Levy and Natasha Leggero

Comedians Dan Levy and Natasha Leggero join Kat and Mike to talk about their wildly funny show House Hunters Comedians on Couches: Unfiltered. After that Jasmine Roth shares ideas for sprucing up your home’s exterior.

Moving Day Tips: How to Pack for a Move

These 10 packing tips will help you move more efficiently and smoothly.

Moving Checklist

Use this week-by-week checklist to plan your move to a new home.

5 Types of Roommates and How to Handle Them

The Rental Girl reveals the secrets to successfully sharing space.

HGTV Obsessed Episode 38: Tarek El Moussa and Heather Rae Young

Tarek and Heather talk about how to avoid rookie mistakes when house flipping, interior design trends and details about their bridal shower and upcoming wedding.

Sell the Benefits of Your Smaller Home

Impress buyers with money-saving and eco-friendly features.

Foolproof Paint Colors That Will Sell Your Home

Find out the best interior and exterior paint colors to sell your home.

Go Shopping

Refresh your home with stylish products handpicked by HGTV editors.

Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.