Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Vacation Home

What it is:

A vacation home is a house that the owner uses only a few days or weeks per year.

How it works (Example):

Let's say John Doe lives in Minneapolis. He gets sick of the winters there and buys a house in Phoenix. He spends two weeks a year there and rents it out for five other months. This is his vacation home.

People can have more than one vacation home. Vacation homes are different from rental properties, which are more like business assets that the homeowners uses to generate income (rents) and capital gains (profit on the sale of the home).
 

Why it Matters:

Vacation homes are wonderful to have, but they present some financial challenges. For example, mortgages on second homes usually are more expensive because they are more likely to default. If the homeowner rents out the property, the property can become a business property, which creates opportunities to deduct rental expenses and other costs that could lower (or in some cases, increase) tax liabilities. The IRS considers vacation homes as personal residences the homeowner uses for at least 14 days per year or rents out to others for more than 10% of the year.