The Vacation Home Primer

May 4, 2016  |  

The Vacation Home Primer

Key Takeaways:

  • The purchases of vacation homes have spiked over the past few years.
  • Before purchasing, consider whether you plan on using it yourself or renting.
  • When considering a purchase, account for extra expenses such as insurance, taxes, utilities, furnishings and upkeep before taking the plunge.

Summer is coming, so if you’re like me you can’t wait for the pending weekend trips to the beach.  As a former Mack & Manco’s employee and boardwalk lover, I’m partial to Ocean City, NJ.  But whether you are a beach bum or ski bum, most people would love to have a second home in their favorite destination. If you are planning on buying a vacation home, you’re not alone.  According to the National Association of Realtors, the purchase of vacation homes jumped more than 50% in 2014 to almost 1.1 million homes.

Although the number of vacation home purchases dropped in 2015, the median sale price increased by almost 30%.  Given the financial impact of such a purchase, you’ll want to make sure you have all your ducks in a row before buying your own private getaway.  Here are some things to keep in mind before purchasing your dream vacation home:

  • Use or Rent? – The first big decision you need to make is whether you will use the vacation home yourself or if you will rent it for extra income.  If you plan to mostly rent the property, I suggest consulting with a CPA first given you’ll have income and expenses (particularly depreciation and operating expenses) that you need to properly account for.  If you plan on using the property yourself but would like to make some extra income, the IRS allows you to rent it for up to 14 days per year income tax-free!
  • Financing the purchase – The majority of purchasers will have to finance at least a portion of a second home.  If you do borrow money, you’ll most likely need to come up with a large down payment.  Depending on your credit score, a jumbo mortgage (or borrowings of greater than $417,000 for a single family home) lender typically requires you to put down anywhere from 20-30% depending on your credit score.  And if you have an existing mortgage on your primary residence, you’ll also have to prove that your cash flow is sufficient to carry both payments.
  • Insurance and taxes – These are sometimes the forgotten expenses when purchasing a home, but can be unbelievably expensive in certain vacation areas.  A family I know that owns a $1,000,000 house at the Jersey shore pays about $3,500/yr in homeowner’s insurance, almost $3,000/yr in basic and excess flood insurance, and $10,000/yr in property taxes.  Things get expensive real quick at the beach!
  • Utilities – Depending on how often the property is used, these can be just as high as your primary home, or even higher!  The same family that has the shore house I mentioned above has a monthly water bill that is triple what their water bill is at their primary home in Pennsylvania.
  • Furnishings and upkeep – You won’t be spending all of your time on the beach or the slopes, so you’ll have to furnish the new house as well as keep it up.  Consider the costs of new furniture, lawn service, landscaping, etc. when doing your calculations.
  • Tax breaks – Finally some good news.  Even if the vacation home will not be your primary residence, you may be able to still deduct the interest expense up to the first $1,000,000 in financing.  Federal tax law allows this deduction for your primary home and one other residence, as long as the mortgage is used to purchase or substantially rehabilitate the property.  This can sometimes ease the burden of the additional costs listed above.

If you are considering a vacation home purchase and would like to talk through this some more, feel free to contact me anytime.  Enjoy the rest of spring and your summer!


1. Historical performance is not indicative of any specific investment or future results.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss of income and/or principal to the investor. 2. Nothing in this communication is intended to be or should be construed as individualized investment advice.  All content is of a general nature and solely for educational, informational and illustrative purposes. 3. Adviser is not licensed as a mortgage broker or agency and does not provide or intend to provide any mortgage-related services.


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About Patrick Runyen

As a Wealth Manager at Independence Advisors, Patrick Runyen, CPA/PFS, CFP® works closely with clients to implement wealth management solutions. He leverages his technical financial planning and consulting experience to assist clients with investment counseling, retirement planning, estate planning, wealth enhancement, asset protection, tax planning, and other personally significant financial decisions. CLICK HERE TO ASK PAT.

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