Skip to main content

5 questions to ask before buying a vacation home

What we'll cover

  • Costs associated with a second home

  • Vacation homes vs. rental properties

  • Tax implications of buying a vacation home

Owning a vacation home can mean no longer paying for hotels or property rentals in your favorite spot to get out of town. Before looking at listings, ask yourself a few questions to ensure buying a vacation home is right for you.

1. Can I afford buying a vacation home?

Vacation homes can involve more costs than a primary home. Lenders may require a larger down payment, for instance, or a higher credit score .

Other costs can include:

  • Homeowner's insurance

  • Property taxes

  • Utilities

  • Maintenance and upkeep

  • HOA fees

  • Flood insurance

  • Furnishings

  • Property management

Keep in mind, rental properties and vacation homes are financed differently. If you're looking to rent out the home, it may be considered an investment property rather than a second home.

2. Where's the best place to buy a vacation home?

Where you choose to buy matters from a cost perspective, especially if an area has higher property taxes or homeowner's insurance rates. If you want to use a vacation home to generate rental income, for example, you might look for a property in an area that gets consistent tourism traffic.

Consider how your home may be exposed to extreme weather events. Homeowner's insurance may not cover natural disaster-related damages in areas where storms, flooding or earthquakes are more prevalent.

Finally, think about what kind of vacation home best fits your lifestyle – a beachfront home or a cabin in the mountains?

3. What are the tax implications of buying a vacation home?

Before buying a vacation home, know which tax breaks you might qualify for and tax bills you'll pay.

For instance, the IRS allows you to deduct property tax payments for a second home. The limit for all state and local tax deductions , including property taxes, is set at $10,000 per year if you're single or married and filing jointly.

Mortgage interest on a vacation home is also tax deductible. If you are single or married and filing jointly, then you're limited to deducting mortgage interest on $750,000 in qualified debt, including vacation homes and your principal residence.

When renting your residence for 14 or fewer days during the year, rental income is tax-free. You still get all the standard tax deductions that you would with a primary residence.

But if you rent the home out for more than 14 days during the year, rental income must be reported to the IRS. You can deduct rental expenses, including hiring a property manager and costs you pay toward maintenance and upkeep.

Talking to an accountant or tax professional could help you understand the tax consequences.

4. Is buying a timeshare a better option?

Timeshares allow you to have the use of a vacation home part-time with fractional ownership. While this might sound like a good idea, there are some downsides.

Owning a timeshare typically means paying an upfront fee to buy into a vacation property and being responsible for annual fees, as well as utilities and maintenance costs. If you only have limited access to the property during the year, you may not get your money's worth in the long run.

5. How do I get started with buying a vacation home?

Start by exploring properties. You can use online tools like ComeHome to filter properties and find a home that fits your needs and budget.

After that, find a lender like Ally Home to help you find the right mortgage option. You can try out our mortgage payment calculator to estimate your monthly loan payments.

If you're ready to turn your beloved getaway destination into your home away from home, buying a vacation residence could be something you'll cherish for years to come.

Explore more

Invest Spend Taxes

Read next

Young couple sitting on the floor looking at plans for their home Which type of mortgage loan is right for you?

Feb. 27, 2023  •  9 min read

 A man is passing a picture frame to a woman from a moving truck. How to rent out your house

Oct 23, 2023  •  3 min read

Money solutions and strategies sent straight to your inbox.

Tips and tools to help you build your best financial future.

Let's Connect