Vacation Home

Vacation Home

What is a vacation home?

A vacation home (also called a secondary or recreational property) is a dwelling other than your primary residence, used mainly for vacations or recreation. It can be any housing type—cottage, condo, cabin—and is often located away from where you live year-round. Many owners rent their vacation homes when not using them.

Key points

• Vacation homes are secondary properties used primarily for personal recreation.
• Owners frequently rent them short-term to offset costs, but rental income can be irregular.
• Owning a vacation home brings recurring operating costs and different tax rules than a primary residence.
• Timeshares are a form of shared vacation ownership with restricted use periods.

Renting and tax rules

IRS rules treat a dwelling as a residence for tax purposes if you use it for personal purposes for more than the greater of 14 days or 10% of the days it’s rented at fair rental value. Practical implications:
* If you rent the home 14 days or fewer in a year, you generally do not need to report the rental income.
* If you rent it 15 days or more, you must report rental income (typically on Schedule E) and follow rental/residence allocation rules.
* If the property qualifies as a residence under the IRS test, deductible expenses (mortgage interest, property taxes, casualty losses) are subject to limits tied to personal use and rental income.
* If it’s not treated as a personal residence, you can deduct rental expenses even if they exceed rental income, although passive activity loss rules may limit losses.

Common deductible rental expenses: mortgage interest (rental portion), real estate taxes, advertising, commissions, repairs, legal fees, supplies, insurance, and operating costs allocated to the rental period.

Financial implications and ongoing costs

Owning a vacation home involves more than the purchase price. Typical ongoing costs include:
* Mortgage payments and interest—vacation home loans often carry higher interest rates.
* Property taxes—can be significant depending on location and assessed value.
* Insurance—coverage levels may be higher in disaster-prone areas and lenders often require specific policies.
* Maintenance and repairs—cleaning, landscaping, seasonal preparations, and emergency work.
* Consumables and stocking—replenishing supplies before visits.
* Management fees—if you hire a property manager or use booking platforms.
* Market risk—property values fluctuate with broader economic conditions.

Rental income can offset some costs but is usually less stable than income from long-term rentals. Be prepared for cash-flow variability and periods when you must cover expenses out of pocket.

Selling and capital gains

Vacation homes are treated as personal capital assets. When you sell, you typically report capital gains on Schedule D. The primary-residence exclusion ($250,000 single / $500,000 married filing jointly) generally does not apply to vacation homes unless the property meets the IRS ownership and use tests for a primary residence (usually ownership and use for at least two of the five years before the sale).

Challenges

• Distance and logistics: remote properties are harder to maintain and respond to emergencies.
• Natural hazards: coastal, flood, wildfire, or hurricane risks can increase costs and insurance needs.
• Time use versus investment: you may not be able to use the property as often as planned, reducing personal benefit.
• Emotional attachment: sentimental value can complicate selling decisions even when financially prudent.
• Management burden: short-term rentals demand more hands-on management or higher management fees.

Vacation home vs. investment property vs. timeshare

• Investment property: Bought primarily to generate rental income or resale profit; can be residential or commercial and does not require personal use.
• Vacation home used as investment: If you rent your vacation home often, it can function as an investment property, but tax treatment depends on personal use and rental days.
• Timeshare: You purchase the right to use a property for a specific period (often a week) each year. Ownership cost is usually lower than outright ownership but use is limited to the purchased time slot.

Is buying a vacation home a good idea?

That depends on your finances, goals, and how you plan to use the property. Consider:
* Ability to cover ongoing costs without relying solely on rental income.
* Frequency and length of your visits—shorter, frequent trips favor closer properties.
* Risk tolerance for an illiquid asset that can require substantial upkeep.
* Financial guidance: many advisors suggest limiting direct exposure—commonly cited guidance is keeping vacation property to about 10–15% of net worth, but individual circumstances vary.

Practical guidelines

• Distance: For short, frequent trips, pick a property within a few hours’ drive; for seasonal escapes, a longer trip can be reasonable.
• Budgeting: Include mortgage, taxes, insurance, maintenance, management, and a contingency reserve for unexpected repairs.
• Insurance and hazard planning: Buy appropriate coverage for location-specific risks and plan for disaster preparedness if you’re far away.
• Tax planning: Understand IRS personal-use and rental-day rules; track days of personal use and rental activity carefully.
• Exit strategy: Consider resale prospects and how long you plan to hold the property.

Bottom line

A vacation home can provide personal enjoyment and potential rental income, but it also brings recurring expenses, management responsibilities, and tax complications. Evaluate how often you’ll use it, whether you can comfortably cover costs if rental income falls short, and how the property fits into your broader financial plan before buying.

Sources (selected)
* IRS Publication 527, Residential Rental Property
* IRS Publication 523, Selling Your Home
* IRS topic guidance on renting residential and vacation property
* U.S. Census Bureau data on vacation homes