How Much of Your Income Should You Allocate for a Vacation Home?

Financial advisor Chuck Czajka from Florida suggests that people should allocate 15 percent of their gross income for “fun vacations and spending”. If you don't want to actively manage your vacation home, you can turn it into a mixed-use property instead of an investment property. This means that taxes will change due to the change in designation, mainly because passive losses cannot be used. You can claim a percentage of mortgage interest and property taxes as deductions from your income tax.

Your debt-to-income ratio will be a major factor in deciding how much a vacation home you can afford. Unless you plan to manage the vacation home yourself, it's best to hire a property management service. The American dream of owning a home has changed over the past 50 years, expanding to second homes or vacation homes. Under IRS rules, a vacation property can be rented for up to two weeks (14 nights) each year without the need to report rental income.

A vacation home needs maintenance like any other property, from lawn care, oven tuning and painting to cleaning gutters or replacing putty. If you have equity accumulated in your primary residence, you may also be able to borrow against the value of your home to maximize the borrowing power of your vacation home. Depending on the lender, you may be able to credit up to 70% to 75% of projected fair rents in the market (in Canada and the U. S.

Department of State, respectively) determined with an appraisal when purchasing a vacation home. Vacation homeowners have specific rules that must be followed so that they can deduct expenses related to rental property. Rental expenses, up to the level of rental income, as well as property taxes and mortgage interest, can still be deducted. As a result, vacation homeowners may be entitled to certain tax benefits that could help make their vacation home more affordable.

Keep in mind that you may need special insurance coverage, such as homeowners insurance, if you plan to rent your vacation home. For example, if you want to buy a vacation home with an income suite, there are rewards and risks associated with it. You may not earn enough from renting the home to offset your expenses. If you limit your personal use to 14 days or 10% of the time the vacation home is rented, it is considered a business. When considering how much of your income should go towards buying a vacation home, it's important to take into account all factors such as taxes, maintenance costs and insurance coverage. It's also important to remember that if you plan on renting out your vacation home for income, you should make sure that you will earn enough from it to cover all expenses.

Cathleen Testa
Cathleen Testa

Typical travel ninja. Hardcore food enthusiast. Evil webaholic. Avid internet expert. Unapologetic social mediaholic.