Springtime is a very popular season for buying a home or selling a home. So it would naturally follow that springtime is also the season for a buying second home. You know Minnesota residents love their cabins “up north.” Many other Minnesota residents see dollar signs at the thought of generating income by renting out a home to tenants.
According to the National Association of Realtors®, second-home sales fell along with the overall housing market in 2007. However, nearly a third of all homes purchased nationwide last year were either vacation or investment properties. In 2007, sales of vacation homes were down 30.6 percent while sales of homes intended to be investment properties fell 18 percent compared to 2006. An uncertain economy and the credit crunch which the U.S. has been experiencing contributed to the sales decline.
Whether you want a vacation home or a rental property, purchasing a second home can give you many of the same benefits as your first home. It is important to understand the tax implications before you buy, as depending on how you would like to use the property, they are different. Knowing the differences can help you make the most of your second home investment.
Let’s talk about the money, as investing in a second home could potentially give you advantages several ways. The first scenario is if the property will be a “second home” or vacation property. If you are going to purchase a vacation home, the interest you pay on the mortgage is tax deductible, just like your first home.
The second scenario is if the home will be strictly a rental property, you can use it as a source of income, although the tax implications will be different. You cannot deduct the interest from a mortgage on a rental property and you must report rental income to the IRS. Although you can’t deduct mortgage interest for an investment property, you can deduct operating expenses like maintenance and advertising costs that exceed the rent you collect, as well as losses on the sale of the home. Neither is deductible for a second home.
The third scenario is a little bit of column A, and a little bit of column B. Your second home can serve a dual purpose as a rental property and a vacation home at the same time. If this is your plan, you must personally use the home 14 days per year or one day for every 10 days it is rented out, depending on which is greater.
Now, let’s talk about the lifestyle benefits. If your second home will serve as a personal getaway, it could serve as your own private vacation spot. A lake-side cottage or a cabin in the woods can by your retreat from the stress of daily life. Just think about how your weekends will change, knowing you have a place to which you can escape and relax. The quality time you could get with your family and friends is very appealing.
That sounds great, right? There is at least one thing to consider though: Mortgage lenders are tougher on second-home loan applications than on primary-home loans. The reason for this is obvious, as by definition, the finances of a second-home buyer are stretched thinner. The result is that second-home rates tend to run one-quarter to one-half point higher than those of first residences.
That being said, the current atmosphere surrounding second-home lending is lenient compared to previous years. The typical second home buyer tends to be more affluent than single home buyers, which make these consumers valuable to lenders. It is important to determine your finances ahead of time to ensure you can afford it before approaching a lender. Second homes are not for everyone!