What Is a Vacation Home?

A person enjoys their vacation cabin.
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DEFINITION
A vacation home is a property other than your primary residence that you use for recreation.

A vacation home is a property other than your primary residence that you use for recreation. Vacation homes typically have different financing requirements than either your main home or an investment property. If you earn any rental income from the vacation home, you’ll also need to be aware of the rules that govern how that income is taxed.

Let’s take a closer look at vacation homes, how you might use one, and whether buying this type of secondary property is a good idea for you.

Definition and Examples of Vacation Homes

The definition of a vacation home may seem fairly obvious: It’s an additional property you and your family visit on occasion and typically use for recreation. However, it’s not as simple as just being an extra house. How often you use it, whether you rent it out, and even how far away it is from your primary residence may all affect your property’s status as a vacation home.

  • Alternate names: vacation property, second home, secondary residence

For example, homes that can qualify as vacation homes include cottages, condos, single-family houses, and cabins.

How Vacation Homes Work

While owning a vacation home might sound appealing, it’s important to consider the factors that make this kind of property different from other types of homes.

For example, you’ll typically need a larger down payment for a vacation home than you would for a primary residence—generally at least 10%. You’ll also need to meet several important criteria generally required by lenders:

  • You must live in the home for a portion of the year.
  • It must be a one-unit dwelling.
  • The property must be accessible year-round, and must not be a timeshare or fractional ownership property.
  • The home must not be operated by a rental or property management company.

Some lenders also require a vacation property be located a minimum distance away from your primary residence. For example, your vacation home may need to be at least 50 miles from your main home.

If you plan to rent out your vacation home when you’re not using it, you’ll have to consider potential tax implications. The IRS also has strict rules when it comes to what qualifies as a vacation property. A vacation home qualifies as a residence if you visit it for personal use for the greater of 14 days or 10% of the time you rent it out (for example, at least 20 days if it’s rented out for 200 days per year).

If you rent out your vacation home for fewer than 15 days a year, you don’t need to report the income you earn. However, you won’t be able to deduct any expenses, such as mortgage interest or property taxes, as rental expenses.

Vacation Home vs. Investment Property

  Vacation Home Investment Property
Purpose Primarily to visit on vacation; sometimes used to earn income Solely to generate income
Distance from primary residence Minimum distance often required by lenders Not required
Mortgage rates Typically lower than for an investment property Often higher than for a vacation home
Tax treatment Can claim some deductions; taxes depend on whether and how often you rent it out Must claim income on taxes; can claim some deductions

Before you buy a vacation home, it’s crucial to understand the differences between vacation homes and investment properties. The biggest factor is whether you plan to rent out your vacation property when you’re not using it, and if so, how often.

For example, the interest rate you’ll receive on your mortgage may depend on how the lender views your property. If it qualifies as a vacation home rather than an investment property, you may be eligible for lower interest rates. You may have to agree to additional lender criteria, such as agreeing that the home will not be rented out for more than 180 days per year.

IRS rules don’t require you to report occasional rental income from your vacation home, as long as it qualifies as a personal residence and you rent it out for fewer than 15 days per year. However, investment property rental income must be included on your tax return. The benefit is that you’ll also be able to deduct rental expenses such as maintenance, utilities, and insurance.

Is a Vacation Home Worth It for You?

Deciding whether or not a vacation home is a good fit for your family is a personal decision. There are plenty of situations in which buying a vacation home may be a good option for you, especially when you’re looking to make an investment. Like other real estate, vacation homes have the opportunity to build equity. You may also be able to rent out your vacation home when you’re not using it, which can create a nice income stream.

However, you’ll also want to consider how often you’ll be able to visit your vacation home. Since many lenders will want your vacation home to be located a good distance away from your primary residence, you’ll need to factor in travel time and costs, especially if the trip will require plane travel. Failing to spend enough time at your vacation home and renting it out often may actually turn your vacation home into an investment property, which can affect your taxes.

Second homes also come with additional costs, including mortgages, property taxes, insurance, and maintenance expenses. Consider these expenses before buying to see if a vacation home will fit into your budget.

Key Takeaways

  • A vacation home is a type of second property that you visit occasionally for recreational purposes.
  • You may also rent it out when you’re not using it, as long as you don’t violate lender or homeowners insurance policies. Whether you need to report the income depends how often you rent it out.
  • Tax laws and financing criteria apply differently to vacation homes than to primary residences or investment properties.
  • A vacation home can be a good investment, but also comes with recurring costs.

Article Sources

  1. Rocket Mortgage. “How Much Do You Need for a Down Payment To Buy a House?” See “Down Payment on Your Secondary Residence.” Accessed Feb. 3, 2022.

  2. IRS. “Topic No. 415 Renting Residential and Vacation Property.” See “Rental Property/Personal Use.” Accessed Feb. 3, 2022.

  3. Quicken Loans. “How To Buy a Vacation Home.” See “What Second Home Status Means for Renting Out Your Vacation Home.” Accessed Feb. 3, 2022.