Are you considering renting out your second home? You can do so as long as you meet certain criteria. To qualify, you must live in the home for at least 14 days a year or 10% of the time you rent it out. All other rules for second homes still apply when you get a loan, such as being more than 50 miles away from your primary residence and being suitable for year-round use. You may be wondering if it's possible to convert your second home into a rental property if you have a mortgage on it.
The answer is yes, but there are several things to consider first. Most importantly, you should review the terms of your current mortgage before making any changes. Some homeowners use their vacation home as a source of income by renting it out when they're not using it. A vacation home is classified as a second home, so the mortgage interest rates will be those of a second home loan.
It's important to note that you cannot own two second homes in the same area, even if most residences in the community are considered vacation homes. Owning a vacation home may seem like something only the wealthy can do, but that's not necessarily true. If you want to take advantage of tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code (IRC), there are certain requirements you must meet. To qualify, you must have owned the vacation home for 24 months prior to the exchange and rented it out for 14 or more days during each 12-month period.
Additionally, personal use must be restricted to 14 days or 10% of the number of days rented in a fair rental market within that 12-month period. It's important to note that vacation homes or second homes maintained primarily for personal use do not qualify for tax-deferred exchange treatment under IRC §1031. If you never live or even vacation in a property, but have it for investment purposes, it is considered a rental house.