Whether it’s on the beach, tucked far away in the mountains or in a bustling city, perhaps owning a second home has always been one of your dreams. But before you start dreaming of frequent retreats to your hideaway in the hills, you need to consider all the pros and cons of owning a second home.
Pro: Vacation Rental Income
If your potential second home is in an area that attracts renters, you may be able to use your house to generate extra income. After all, if it's a second home, you won't be spending all of your time there. You can use this opportunity to rent your house and generate income that can be used to subside your mortgage, or even more if you are able to rent on a consistent basis. Your rental income can even help fight the costs of the depreciation on the actual house over the course of your ownership.
Pro: Tax Benefits
Just like your primary residence, owning a second home can provide you with some tax benefits you may not have been aware of, according to realtor.com. If buying a second home puts you over the $1 million debt threshold, you may be able to write off all of your interest on your loan payments [1]. If you plan to use your second home to both vacation and generate rent revenue, you also may be able to deduct a portion of any rental-related expenses come tax season [1].
Pro: Potential Appreciation
Notice that this doesn't say investment opportunity; while owning a home can save you money compared to renting over a number of years, The Wall Street Journal has cited closing costs, maintenance expenses, and low rates of return as reasons you shouldn't necessarily buy a home as an investment opportunity [2]. However, a home, unlike a car or almost any other type of good, has a reasonable possibility of appreciating over your term of ownership.
Con: The Challenge in finding renters
Before you start dreaming about the perfect property that pays for itself through rental income, take a step back. "Every day that an investment property sits empty means a loss in profitability to an investor," says real estate agent Rhonda Mogul in an Investopedia article [3]. You should be ready for the possibility of paying your mortgage without rent income (more on that below.)
Con: Struggling to Sell Your Home
If you ever decide to sell your house, you may have difficulty getting it sold. It’s important to remember that even if your house has appreciated in value, you can't realize that gain without selling your home. It may take many months to find the right buyer.
Con: Affordability
An ill-timed purchase of a second home could be a financial disaster. Before you start shopping for a second home, you need to make sure you can actually afford it. Learnvest recommends that you evaluate important aspects of your financial situation, like high interest debt, college savings for your children, and the status of your retirement funds before taking the plunge on a new home [4].
Con: Special Attention and Maintenance
Over the course of your ownership, your home will need attention to ensure it retains value, and is compliant with all renting regulations. As the owner, you will either need to pay for a landlord to take care of your house, or you will need to roll up your sleeves and do it yourself.
Sources:
[1] 5 Tax Benefits of owning a second home, Realtor
[2] Don't Buy a home as an investment, Wall Street Journal
[3] Does it make sense to buy a second Home, Investopedia
[4] 8 Questions you should ask yourself before buying a second home, Learnvest
FAQs
Of course, when buying a second home, you can't ignore the associated expenses, including ongoing maintenance and upkeep and property taxes. These types of expenses can strain your budget or limit your financial ability to travel elsewhere.
Is buying a second house a good idea? ›
A secondary property can be a great investment in your future. It can also help you earn additional income and provide a getaway from everyday life. If you've been thinking about purchasing a second home, here are some key considerations and tips for getting started.
How does owning a second home affect your taxes? ›
Key Takeaways
Mortgage interest on a second home is tax deductible within the same limits as the mortgage on your first home. Property taxes paid on additional homes can also be tax deductible, regardless of the number of homes you own.
What are the IRS tax rules for second homes? ›
If you rented out your second home for profit, gain usually is taxed as capital gain. So, you can deduct the loss. The part of the gain you can attribute to depreciation is taxed at a maximum rate of 28%. If you used the home for personal purposes and rented it, you must treat the sale as part personal, part business.
Can a married couple have two primary residences? ›
For example, a married couple could acquire two primary residences if each spouse buys a primary residence and keeps their mortgages separate. This would mean each spouse having sufficient income on their own to buy a home. Additionally, conventional loans can create a second primary residence in some situations.
Is it harder to get a mortgage on a second home? ›
Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage. Your interest rate on a second mortgage may also be higher than on your primary mortgage.
What is the second house rule? ›
The Second House is related to our personal finances, material possessions, and the concept of value. While it does rule money, it also covers our emotions, which live inside of us (and often affect us even more than money does). Natal planets in the Second House tend to seek security through their material world.
Why do people buy second homes? ›
Owning a second home can boast many benefits including a sound financial strategy and a long-term plan for retirement while also offering plenty of lifestyle options. Here are the top four reasons people take a leap into buying a second home!
Do you have to put 20 down on a second home? ›
How much do I need for a down payment on a second home? The down payment for a first home can be as low as 0% and as high as 20% for a conventional loan. But the required down payment for a second home is around 10%, and sometimes more than 20%.
Can you write off expenses on a second home? ›
After all, you can significantly reduce the cost of owning a second home by claiming tax deductions for mortgage interest, property taxes, and rental expenses.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
Does the sale of a second home count as income? ›
When you sell a vacation home, rental, fix-and-flip, or any second property that is not your primary residence, you will typically be responsible for paying capital gains taxes on any profits you make, at a rate of up to 20%, depending on your tax bracket. But you may be able to mitigate those taxes.
How does the IRS know you sold a second home? ›
Answer: Your second residence (such as a vacation home) is considered a capital asset. Use Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets to report sales, exchanges, and other dispositions of capital assets.
Can you take a loss on a second home? ›
No, the sale of personal property cannot generate a loss.
Are mortgage rates higher for second homes? ›
Generally, you can expect to have a higher mortgage rate on your second home loan compared to the one on your primary residence, so you'll pay more in interest over time. You might also have a higher rate if you decide to refinance your second home mortgage down the line.
Do people regret buying a second home? ›
Gregg has some advice that a potential buyer might not want to hear: “Having been in the business for almost 40 years, one of the most interesting things I have found is that most people who buy a second home regret the decision after four or five years.
What is bad about a second mortgage? ›
Higher Interest Rates
Second mortgages usually have higher interest rates than first mortgages. This is because lenders see them as riskier. The higher the risk, the higher the rate.
What is the purpose of a second home? ›
This property can be a vacation home or a residence that you can use for work. Essentially, a second home is defined as a place where you would only live for part of the year. The IRS defines a second home as a place that you visit for at least 14 days during the tax year.
Can a second home be considered a primary residence? ›
If a property is legally regarded as your second home, it ican't be your primary residence. Your primary residence must be where you spend the majority of your time.
