• Discounts and special offers
  • Subscriber-only articles and interviews
  • Breaking news and trending topics

Already a subscriber?

By signing up, you accept Moneywise's Terms of Use, Subscription Agreement, and Privacy Policy.

Not interested ?

What are the advantages?

Apart from the obvious benefits of having a permanent vacation destination, as well as a familiar place to escape to and relax, owning a vacation property has other advantages.

An investment with a tangible use

Much like your primary residence, a vacation property is an asset that has practical uses. You're not just sitting back waiting for it to provide income or to rise in value, but you're getting a present use out of it in the form of a vacation escape.

You can rent it out if you need extra income

You can keep the property primarily as a vacation home, but if money ever gets tight you can always rent it out for income. And since it is a second home that will be easier and less disruptive to do than it would be for your primary residence.

If you're thinking about becoming a landlord, check out our Baselane review of their landlord banking and rental management platform.

It will likely rise in value in the long term

Like most forms of real estate, vacation properties will rise in value over time. And during speculative periods in the real estate market, the value increase on vacation property can be spectacular.

Futher reading: Best US housing markets

It's a potential retirement home

Vacation property can provide the owner with the ability to “test drive” a home as a potential retirement home. You can buy the house early in life, get comfortable with the area it's located in, and payoff the mortgage in time for retirement. That will free you up to sell your primary residence to increase your retirement portfolio. In that way a major component of your retirement plan will be taken care of while you're enjoying the home.

Head to our dedicated retirement planning page for a treasure trove of information

Vacation property prices are depressed in much of the country

This is bad news if you own a vacation property in an area where real estate prices have been particularly hard-hit. But if you're looking to buy a vacation property in such an area, the timing couldn't be better. In many traditional vacation property hotspots, like Florida, Nevada, and Arizona, prices are now well below their peak levels. If you're a buyer, entire vacation property markets are now on sale!

Read more: How to create wealth by investing in real estate

Find a financial adviser in minutes

Are you confident in your retirement savings? Get advice on your investment portfolio from a certified professional through WiserAdvisor. It only takes 5 minutes to connect with an adviser who puts you first.

Get Started

What are the risks?

Vacation property tends to have wider price swings than other property types. During real estate booms, it can rise in price much faster than residential property, not the least of which because it tends to attract more affluent buyers. But in down markets prices can fall faster too.

Vacation property is luxury real estate, not the basic roof-over-your head type. It’s more discretionary than it is necessary, and that means the market for it can dry up much more quickly. When it does, prices can crash even when the general housing market is stable.

It’s often located in environmentally volatile areas that can physically threaten not just the property itself but the entire surrounding community. Waterfront locations are common, which opens the possibility of flooding or ocean storms. A single severe coastal storm could drop property values overnight.

Reduce your risk: How to invest in rental properties without the responsibility of being a landlord

Income tax considerations

The Internal Revenue Service (IRS) has very specific rules in regard to vacation properties. The dividing line between classifying the property as a vacation home or as an investment property is defined by the number of days that you as the property owner occupy it for personal use.

If you use the property for personal use for more than the greater of 14 days, or more than 10% of the number of days it’s rented out, it is considered a vacation property. If the property is rented out for more than 14 days, it’s considered an investment property.

If the property qualifies as a vacation home, you can deduct mortgage interest and real estate taxes on Schedule A of your income tax return, just as you would for your primary residence. Other expenses, such as insurance, repairs and maintenance and condo fees will not be deductible.

If the house qualifies as an investment property, you will be able to deduct all expenses connected with the property at least up to the amount of rental income received from it.

You may be able to deduct net losses on the property, but that will depend on the amount you have invested in the property that’s considered “at risk”, whether or not your participation in the investment is considered “passive“, and the level of your modified adjusted gross income. Translation: consult your tax preparer to determine the limit of rental real estate losses you can deduct.

This 2 Minute Move Could Knock $500/Year off Your Car Insurance in 2024

Saving money on car insurance with BestMoney is a simple way to reduce your expenses. You’ll often get the same, or even better, insurance for less than what you’re paying right now.

There’s no reason not to at least try this free service. Check out BestMoney today, and take a turn in the right direction.

Get Started

Vacation property and foreign money

There's one more aspect of vacation property that rates its own discussion, especially now. Earlier we discussed how vacation property prices can rise faster than the overall market during speculative booms. Part of the reason for this is foreign money.

The US has traditionally been a haven for foreign money. Wealthy foreigners often move their money here in order to escape either economic declines or political instability in their home countries. When they do, their money often flows into real estate, and much of that goes into vacation property.

There are several reasons for this. For one, foreigners are looking for a second home situation and vacation properties are perfect for that. For another, foreigners often buy into the US vacation property market after price crashes. Still another reason is that they want to live in homes that are located in areas that they've seen in the movies and on TV. Those are often vacation havens in places like Florida, California and Arizona.

Right now the vacation property market in the United States in general is depressed. At the same time, people from China and much of the developing world are pouring their money into US real estate looking for an escape hatch in a stable place. Well-to-do Europeans are also looking to move money into the US in order to escape the declining economic fortunes there.

What this all means is that we now have a rare combination of events that favor vacation property. If you're willing to accept and deal with the risks of investing in vacation properties, now could be a once-in-a-lifetime opportunity.

Sponsored

Follow These Steps if you Want to Retire Early

Secure your financial future with a tailored plan to maximize investments, navigate taxes, and retire comfortably.

Zoe Financial is an online platform that can match you with a network of vetted fiduciary advisors who are evaluated based on their credentials, education, experience, and pricing. The best part? - there is no fee to find an advisor.

About the Author

Kevin Mercadante

Kevin Mercadante

Freelance Contributor

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com.

What to Read Next

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.