Second Homes: A Big Decision

During the Covid-19 pandemic, the popularity of second homes jumped due to low mortgage interest rates and the surge in working remotely. Higher rates have dampened the mortgage market, but the interest in second homes continues as people look for:

• A retreat from everyday life
• A future retirement location
• A way to be closer to family
• An investment or income option

However, establishing a second home is a big decision with several moving parts.

Second Home: What Is It?

The term “second home” assumes you’re splitting your time between two or more locations. (For this blog, we’ll consider two homes, a main and a second.) Also, buying a property purely to rent out doesn’t fit the definition. You have to live there part of the year to bestow the title of “second home.”

Also, our definition can include a home you rent or own. When someone rents the same property for the same months year after year, it’s easy to think about it as a second home.

Additionally, a second home can take a variety of forms, such as:

• House
• Condominium or apartment
• Cooperative
• Mobile/manufactured home
• Recreational vehicle or trailer
• Boat

Boats and RVs might seem unconventional as a second home, but the IRS considers each a “qualified home,” assuming they have sleeping, cooking, and toilet facilities.

Note also that ownership can be full or partial. Additionally, instead of owning a second home, you could have contractual rights to use the home for a specified period, such as a timeshare. And, of course, there are rentals where you aren’t the owner.

Finally, second homes differ based on the amount of time you stay there. Tax laws can be a factor. States with income tax want to make sure residents with second homes pay state taxes if they primarily live in the state.

Another factor can be the form of ownership. Full owners can stay in the home anytime they choose. However, partial owners are restricted by contract to specified periods or number of days. The same is true for timeshare contracts that govern the amount of time that can be spent at the property.

So, if this defines a second home, what are the reasons for wanting one?

Second Home: Why?

As mentioned before, there are several reasons why you might want a second home. Let’s look at each in detail.

Retreat

A second home might be a vacation or weekend destination, or it can also be your home for months at a time.

Also, a second home might be devoted entirely to leisure, a remote work location, or a combination of both. Regardless of the amount of time or how you spend your time, there are other motivations for wanting a second home:

• Better weather
• Lifestyle differences such as city versus country living
• Geography features like mountains versus the beach
• Entertainment opportunities like performing arts or sports

Retirement

A second home initially used for vacations can evolve into one’s primary home in retirement. This gives a chance to experience a community before committing to it full-time. Also, it allows you to establish a social network there before retirement.

Closer to Family

A second home might be in one’s hometown, where other family members live. Also, a second home might be a vacation destination for the extended family.

Investment/Income Opportunity

A second home usually represents a real estate asset that changes up or down in value. (Boats and RVs are the exception since they generally depreciate.) Real estate has been an excellent long-term investment in the U.S. over the past few decades so that a second home could yield a profit in the long run.

A second home can also generate income as a rental. Many families can afford a second home by renting their property via Airbnb or VRBO for part of the year.

This overview of the “what” and “why” questions of establishing a second home merely scratches the surface of this complicated subject. Future blogs will cover more details to help you prepare for this big decision.

Let’s Have a Conversation:

What are your views on second homes? Have you thought about acquiring one? Even if you don’t have the finances for it, what would you dream it to be or look like?