What percentage of income should go to vacation home?

Chuck Czajka, a financial advisor in Florida, says he's probably not saving enough. He says he should allocate 15 percent of his gross income for “fun vacations and spending.” If active management doesn't appeal to you or your AGI is too high, spend more time in the cabin and turn it into a mixed-use property rather than an investment property. This means that taxes change with the change of designation, mainly because passive losses cannot be used. But 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 can afford. Unless you plan to supervise your vacation home (and if you rent, manage, and book rentals) yourself, which may be close to a full-time job depending on location and demand, it's often best to hire a property management service. The American dream of buying a home has undergone a considerable amount of change 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 property, from lawn care, oven tuning and a new coat of paint 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 the landlord 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.

Using the example above, let's say you want to buy a vacation home with an income suite. Buying a vacation home comes with rewards and risks, including the possibility that if you plan to rent the home for income, you won't earn enough 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.

Cathleen Testa
Cathleen Testa

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