Investing in a second home as a respite for future family vacations or as a rental property is a luxury that many owners often consider undertaking once their primary mortgage is nearly or wholly or paid off. However, the buying process will differ between obtaining a primary residence, a private second home, or a vacation rental property that will be partially used by others. Those who plan to buy using outright cash will not have to deal with the mortgage limitations on second homes and vacation homes, but they can still find these tips helpful concerning tax breaks.
Buying a Primary Residence
Buyers typically enjoy the best mortgage rates on their primary home purchase. However, there are very specific primary residence qualifications that must be met in order for a dwelling to qualify as such including:
- The resident must live there the majority of each year.
- The home must be within a reasonable distance of the owner's employment.
- Residents must provide proof or residency such as tax returns, driver's license, voter registration, etc.
A primary home's mortgage interest is deductible. Those with loans taken out after 2006 can also claim mortgage insurance payments along with the interest and deduct them—an option not typically available for any type of second home purchase.
Buying a Second Home for Private Vacationing
Those who want a second home for private use will have another set of rules to abide by concerning mortgages and tax rules for second homes. The qualifications to meet the mortgage rules for second homes include:
The home must be a reasonable distance (on average 50 miles minimum) from the primary residence.
Owners must reside there for some portion of the year, an amount which may be determined by the lender.
The dwelling must not be subject to timeshare, rental or property management agreements.
The home must be accessible year round by automobile.
Other things second home buyers should know is that a higher credit score may be necessary to qualify for a loan, especially if their primary home still has a mortgage. Interest rates may also be higher depending on the lender and special circumstances. However, owners can combine and deduct 100 percent of the interest on their primary and secondary homes for tax purposes.
What You Need to Know About Investing in Home Vacation Rentals
Buyers of investment properties to be used as a vacation rental will typically need to meet the same qualifications for a second home, but they may need a larger down payment and a bit higher credit score. Fortunately, rental properties can qualify for generous tax breaks concerning mortgage interest, insurance, maintenance, depreciation and property taxes. However, this is only true if the home is indeed used primarily as a rental and follows certain rules.
Any violation of these rules can eliminate or reduce tax perks. If a Boystown home is rented out fewer than 15 days per year, it's considered a personal vacation home that qualifies for mortgage, interest, and property tax deductions but not other expenses. Vacation properties rented for at least 15 days annually but stay there personally for more than 14 days, the property qualifies as a second home. This means that property taxes, mortgage interest and expenses are only deductible to the extent of the annual rental income, and losses cannot be used to offset any other income.
Looking to buy a primary, secondary or vacation home as an investment property? Contact a local real estate professional to discuss the current market conditions and tax considerations of these purchases.
Ted Guarnero, REALTOR® is a full-time real estate agent with over 1000 homes sold and $400 million in sales. Working with Compass real estate offering professional and effective real estate services to help you succeed in the local real estate market. Visit www.seeChicagorealestate.com for information on downtown Chicago real estate and to get in touch with an expert in the Chicago real estate market. Before you hire your next Realtor call Ted Guarnero 855-See-Chicago, it's on the House !