Tax and Mortgages: What Vacation Home Buyers Need To Know

Buying a vacation home is oftentimes a step taken when homeowners, having achieved certain stability, look for a place to relax away from the bustle of their everyday lives. This, however, comes with its own special set of challenges. Understanding the tax and mortgage considerations when trying to buy a vacation home can help the process go smoothly. For home buyers who are just beginning the process of purchasing a second home, this information can be invaluable.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

Vacation Home Mortgage Requirements

For a homeowner who has purchased a primary residence with a mortgage, the reality of buying a vacation home can be somewhat startling. Down payments and credit requirements are vastly different when buying a vacation home. Those who are not prepared for these differences may find buying a vacation home difficult.

To begin with, lenders require a much higher down payment for a vacation home than for a primary residence. Whereas a mortgage down payment for a primary residence can be as low as 3.5% with an FHA loan, most loans for vacation properties require at least 10% down. More often, the down payment must be at least 20%.

In addition to the higher down payment, lenders require home buyers to meet much stricter credit requirements. In theory, a home buyer with a credit score of 500 or above can buy a primary residence, if purchasing with an FHA loan. For buying a vacation home, a credit score of 725 and above is recommended.

Home buyers who don't meet these qualifications may not be able to secure a mortgage for a vacation home. Lenders are hesitant to approve second mortgages to high-risk buyers, because homeowners are more likely to walk away from a vacation home than a primary residence.

The best way to explore the options is to talk to a reputable lender. Sometimes a good lender can help home buyers come up with creative solutions to their purchasing problems.

Tax Implications of Second Home Ownership

The tax implications of owning a vacation home were always different from the tax implications of owning a primary residence. That said, as of January 1, 2018, tax laws changed and homeowners with vacation properties were affected.

Vacation homeowners who rent out their property to others may need to pay taxes on their vacation home just like a standard rental property. However, this only applies if the homeowner occupies the vacation home for fewer than 14 days out of the year.

Those who own their own primary residence in Culver City are probably aware of the mortgage interest deduction. Many would assume that the mortgage interest deduction only applies to the primary residence, but this is not the case. The mortgage interest deduction can apply to both residences if the combined mortgages equals less than $750,000. Before the tax laws changed, vacation homeowners qualified for a mortgage interest deduction for combined mortgages up to $1 million.

Homeowners with vacation properties should work with an accountant at tax time to ensure that their taxes are done properly. In fact, it's a good idea to consult with an accountant before purchasing the vacation home, to ensure that the taxes are done properly from the very beginning.

Contact a Reputable Lender and Real Estate Agent

Purchasing a second home can be tricky for many buyers. Working with a reputable real estate agent and finding a good lender to help with the process is important. If you're a home buyer who would like a vacation property, start contacting real estate agents and helpful lenders today.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.