Your Second Home: Vacation Home to Permanent Residence

You may have thought a second home, or vacation home, was out of your reach. But what if you could make that home part of your long term financial and retirement plan?

Retirement isn’t what it used to be; there is no grand exit moment, no company party, and no gold watch handed to you, so you can keep time in your condo in Florida. No, these days, plenty of people retire more gradually, staying in their field but going part-time or consulting, working from home a little more often, or switching fields entirely.

As you transition into retirement, you may be able to enjoy a second home in a great location every step of the way. Here’s how it goes.

Before we dive in, though, here's a quick primer on owning a second home, for the uninitiated newcomers out there. Got the info you need now? Let's get started, then!

Step 1: Be a landlord, take a free vacation. Sort of.

You’re still working. A lot. Sure, you have four weeks of vacation a year, because you’ve been with the company for a long time, but can you actually take those days? Probably not. You’re needed on too many projects. You get away for a few long weekends a year, and maybe one full week when the kids are out of school. But maybe the market is looking good for buyers, and there are a few condos for sale in that beach town you’ve always enjoyed.

After saving for a down payment, consider a HELOC on your primary residence to help pay the mortgage on your second home while you find renters. Even better, buy a place that already has a history of regular renters. You won’t be able to sit back and relax, though, since being a landlord can be time-consuming. The extra work will be worth it, as you build equity in your second home.

Remember that if you rent your vacation home for more than 14 days a year, you will need to pay taxes on the rental income. (If you only need to rent it out 14 days a year to break even, you’re in luck, thanks to the “Masters Exemption.”) Though you do pay taxes on your income, you can also take deductions based on the maintenance of your investment property, as long as you personally stay there less than 14 days a year or less than 10 percent of the time it’s rented to other people. Do you find yourself saying “yes” when friends and family ask to use your place? Don’t do it. The IRS counts those as personal days, which will cut down the number of days you’re allowed to enjoy your house.

To get the most enjoyment out of your second home, consider hiring a property management company to take care of the details (and keep it rented) and keep the owner’s closet well-stocked, so you can pick up and go when it’s your turn!

Step 2: Splitting time and working from home.

 Once you’ve built enough equity in your second home and can afford to maintain it without rental income, think about cutting back on your work hours, at least the ones spent in the office, and spending more time in your second home. If you’re married, maybe one of you can spend more time there, with the other coming for weekends. (Hey, absence makes the heart grow fonder, right? Just don’t get too tan, which may arouse jealousy.)

As you spend more time in your second home, and if it’s in a different state from your primary residence, consider which state is the best for your primary residence. Florida, for example, has no personal income tax for residents, so if your second home is there, you might save money by making sure you spend more than half the days in a given year there. Delaware, Washington, and Wyoming also give residents a break on income tax.

Now that both places are home, make sure they’re both comfortable. Some people find that not only do they really prefer having the same microwave, fridge, and bathroom fixtures in both homes, but they can get discounts for buying two at once. When you do have to buy new appliances, it doesn’t hurt to ask for a break. Now that you’re splitting time between two homes, you’ll want to make sure you have enough linens, towels, and even toiletries to furnish both places. You should be able to jump in the car and go.

If promising to work from home certain days a week is allowing you to split time between your two homes, make sure you have adequate office space. Though you can no longer deduct expenses for investment properties, you may be able to use a HELOC or take out a home improvement loan to make your second home a better place to work. And if you do decide to add a home office? Make sure to position it so you have a great view and can enjoy your surroundings.

Step 3: Full-time vacation living!

You did it. Through diligent saving, strategic equity building, and calculated decisions about when to rent and how many days a year to stay, you can finally live in your place full time. The sale of your primary residence may allow you to pay down the mortgage on your second home. Won’t it be nice to just have one, smaller payment after all those years? This is when you realize that paying a mortgage really is a little like putting money in a savings account every month.

When you sell your first home, make sure to take advantage of the capital gains tax exclusion. If you lived in your primary residence at least two of the five years leading up to the sale, you can exclude up to $250,000 profit on the sale from your taxes, $500,000 if you are a married couple. That’s a nice little exemption, isn’t it?

Need a vacation from your vacation? You can also still take advantage of the “Masters Exemption,” and rent your home for less than 14 days a year without paying income tax, so you can head somewhere for a change of scenery.