Best Options for Paying for a Vacation Home

[G-Man]

Best Options for Paying for a Vacation/Second Home

I would like to know what the best options are for paying for a vacation/second home. Specifically, would using a HELOC with a combination of personal cash be the best option to pay for a second home. Another option would be put down x amount of cash (40%) and then finance the rest.

If a HELOC is used, is the interest on the HELOC tax deductible if you use the funds to purchase a vacation/second home?

Would love to hear from others that has purchased a vacation home.


Thanks

 

[Enuff2Eat]

haven't thought about it.. but aren't you add to the cost of vacation by paying interest? Yes, I am curious about it too

 

[tryan]

Mine was a 1031 exchange. A duplex in the hood for lake front land.

 

[RetiredHappy]

No. But then you may if you don't get caught...

Is Home Equity Line of Credit (HELOC) Interest Tax Deductible?
You can deduct interest on a home equity line of credit (HELOC), but only if you use the funds for home improvements. The introduction of the Tax Cuts and Jobs Act (TCJA) eliminated deductions on interest if you use the funds for anything else, such as to consolidate debt.

 

[pb4uski]

I would like to know what the best options are for paying for a vacation/second home. Specifically, would using a HELOC with a combination of personal cash be the best option to pay for a second home. Another option would be put down x amount of cash (40%) and then finance the rest.

If a HELOC is used, is the interest on the HELOC tax deductible if you use the funds to purchase a vacation/second home?

Would love to hear from others that has purchased a vacation home.


Thanks

We used a regular mortgage back in 2005 when we bought our first vacation home. Interest on a second home is tax deductible, but only if you itemize and many people don't itemize anymore.

If you finance the purchase of the second home with a HELOC on the second home then the interest would be deductible if you itemize.

... You can deduct the interest if you’re using the HELOC to buy a second or vacation home, but this home must be the collateral for the debt. In other words, you can’t deduct the interest if you open a HELOC on your primary residence and then use the money to acquire or fix up a new beach house. ...

Source: https://www.bankrate.com/home-equity/home-equity-loan-tax-changes/#heloc

 

[G-Man]

We used a regular mortgage back in 2005 when we bought our first vacation home. Interest on a second home is tax deductible, but only if you itemize and many people don't itemize anymore.

If you finance the purchase of the second home with a HELOC on the second home then the interest would be deductible if you itemize.

Not sure I understand the logistics of this. How would you purchase a second home with a HELOC on the second home before you actually purchase the second home? Not sure I'm following the logic.

 

[hopefullyoneday]

I purchased my second/vac/rental home with a mortgage at 3.8% interest. I rent it out to help cover the costs. I have used my Chase HELOC for anything from buying cars to home improvements and have always claimed the interest on it and have never been asked what the purchase was for.

 

[G-Man]

I purchased my second/vac/rental home with a mortgage at 3.8% interest. I rent it out to help cover the costs. I have used my Chase HELOC for anything from buying cars to home improvements and have always claimed the interest on it and have never been asked what the purchase was for.

Great to hear. The place I'm looking at does not allow short term rentals. Renting the place has some restrictions as well. We plan to use the place often. Probably every weekend.

 

[OldShooter]

Last year we moved into a new lake home that we built. Paid cash, mostly taken from tIRAs. So expensive! We had an open HELOC on our city house so I used that at the end of 2022 to pay contractor's invoices, then paid it off with tIRA money in 2023. That smoothed out the amount of tIRA money that got taxed at higher rates.

As far as using a HELOC on the new house before owning it, I think it would work to use a HELOC on the current house, then pay it off with a HELOC when the new house deal closed. Or possibly just change the collateral though I don't know if that is possible. Drawing from a tIRA and then replacing the funds from the new house HELOC might fit in there somewhere too.

 

[CaliKid]

Most economical way to "own" a second home is just to rent on VRBO, etc.... There are always deals if you look around. You can always, in my experience, find a place for significantly less than the cost of ownership. On the other hand there can be significant non-financial benefits of owning a second home. I contemplate this seemingly daily and so far have been able to talk myself out of it. If we do eventually make the plunge would probably get a traditional mortgage on the vacation home with a significant down payment. For now though we'll keep renting!

 

[G-Man]

Last year we moved into a new lake home that we built. Paid cash, mostly taken from tIRAs. So expensive! We had an open HELOC on our city house so I used that at the end of 2022 to pay contractor's invoices, then paid it off with tIRA money in 2023. That smoothed out the amount of tIRA money that got taxed at higher rates.

As far as using a HELOC on the new house before owning it, I think it would work to use a HELOC on the current house, then pay it off with a HELOC when the new house deal closed. Or possibly just change the collateral though I don't know if that is possible. Drawing from a tIRA and then replacing the funds from the new house HELOC might fit in there somewhere too.

Unfortunately, we don't have a T-IRA. All of our tax-deferred dollars is in a 401k.

You raise an interesting point; can you replace dollars in a T-IRA if it was used to purchase a second home? I would think you would incur a huge tax bill if you withdrawn the dollars from the T-IRA.

 

[G-Man]

Last year we moved into a new lake home that we built. Paid cash, mostly taken from tIRAs. So expensive! We had an open HELOC on our city house so I used that at the end of 2022 to pay contractor's invoices, then paid it off with tIRA money in 2023. That smoothed out the amount of tIRA money that got taxed at higher rates.

As far as using a HELOC on the new house before owning it, I think it would work to use a HELOC on the current house, then pay it off with a HELOC when the new house deal closed. Or possibly just change the collateral though I don't know if that is possible. Drawing from a tIRA and then replacing the funds from the new house HELOC might fit in there somewhere too.

60-day rule

https://www.fool.com/retirement/plans/ira/borrow-from-ira/

 

[LateToFIRE]

Not sure I understand the logistics of this. How would you purchase a second home with a HELOC on the second home before you actually purchase the second home? Not sure I'm following the logic.

Same way you purchase any home with a mortgage - you'd close on the HELOC and draw on it at closing to fund purchase the vacation home. Not exactly conventional, but I don't see why it can't be done.

If I were you, I'd go with a conventional mortgage over a HELOC. Why are you thinking HELOC?

 

[G-Man]

Same way you purchase any home with a mortgage - you'd close on the HELOC and draw on it at closing to fund purchase the vacation home. Not exactly conventional, but I don't see why it can't be done.

If I were you, I'd go with a conventional mortgage over a HELOC. Why are you thinking HELOC?

Because I currently have an open HELOC on my primary residence with $0 balance. Seems easier.

 

[cathy63]

Unfortunately, we don't have a T-IRA. All of our tax-deferred dollars is in a 401k.

You raise an interesting point; can you replace dollars in a T-IRA if it was used to purchase a second home? I would think you would incur a huge tax bill if you withdrawn the dollars from the T-IRA.

If you're still employed, you can borrow from the 401(k). Typically, the loan becomes due if you leave employment, and if you don't repay it, then it becomes a taxable distribution in the year of separation.

You can't officially borrow from an IRA, but you do have 60 days to do a rollover which you can use to replace any funds you take out. This is risky, because if you miss the deadline it's a taxable distribution.

 

[G-Man]

If you're still employed, you can borrow from the 401(k). Typically, the loan becomes due if you leave employment, and if you don't repay it, then it becomes a taxable distribution in the year of separation.

You can't officially borrow from an IRA, but you do have 60 days to do a rollover which you can use to replace any funds you take out. This is risky, because if you miss the deadline it's a taxable distribution.

Thanks for the insight on this. I will check into that.

Also, what about this scenario. You use the HELOC on your primary residence plus a combination of cash to purchase the second home outright in year 2024. Let's assume the value of the second home is $300k and the HELOC amount used were $200k. Since the HELOC was used for the purchase of a second home, the interest is not tax deductible based on my research.


After purchasing the second home outright, now you have $300k worth of equity in the second home. Typically, they will let you borrow up to 80% LTV. That would be $240k. It my outstanding that after the TCJA’s sunset in 2025, if you get a HELOC, the interest on the HELOC is tax deductible no matter what you do with the funds.

So, in 2026, you would get a HELOC on the second home to pay off the HELOC on your primary residence. Now the interest should be tax deductible.

Is my logic correct?

 

[Closet_Gamer]

Most economical way to "own" a second home is just to rent on VRBO, etc.... There are always deals if you look around. You can always, in my experience, find a place for significantly less than the cost of ownership. On the other hand there can be significant non-financial benefits of owning a second home. I contemplate this seemingly daily and so far have been able to talk myself out of it. If we do eventually make the plunge would probably get a traditional mortgage on the vacation home with a significant down payment. For now though we'll keep renting!

We bought a beach house about a year ago. Paid cash and put in some upgrades. We rent it out 10 weeks/yr which covers the basic operating expenses.

I love having our own place. Put the dog and laptop the car and go. No searching, packing, etc.

Definitely you build rent a few weeks a year cheaper. So far this, we really like having it.

 

[G-Man]

We bought a beach house about a year ago. Paid cash and put in some upgrades. We rent it out 10 weeks/yr which covers the basic operating expenses.

I love having our own place. Put the dog and laptop the car and go. No searching, packing, etc.

Definitely you build rent a few weeks a year cheaper. So far this, we really like having it.

Just curious the location?

 

[Lorenzo]

Thanks for the insight on this. I will check into that.

Also, what about this scenario. You use the HELOC on your primary residence plus a combination of cash to purchase the second home outright in year 2024. Let's assume the value of the second home is $300k and the HELOC amount used were $200k. Since the HELOC was used for the purchase of a second home, the interest is not tax deductible based on my research.

After purchasing the second home outright, now you have $300k worth of equity in the second home. Typically, they will let you borrow up to 80% LTV. That would be $240k. It my outstanding that after the TCJA’s sunset in 2025, if you get a HELOC, the interest on the HELOC is tax deductible no matter what you do with the funds.

So, in 2026, you would get a HELOC on the second home to pay off the HELOC on your primary residence. Now the interest should be tax deductible.

Is my logic correct?

That is interesting about the "TCJA's sunset in 2025." Yes, it looks to me like under the present rule the HELOC interest is not be deductible if used for anything other than buying or improving the home that is the HELOC's collateral, but if the TCJA expires as scheduled in 2025 then I think your proposal would work.

 

[G-Man]

That is interesting about the "TCJA's sunset in 2025." Yes, it looks to me like under the present rule theHELOC interest is not be deductible if used for anything other than buying or improving the home that is the HELOC's collateral, but if the TCJA expires as scheduled in 2025 then I think your proposal would work.

Let me do some more research to confirm. If this is possible, that would be great. Anyone else would like to comment on the scenario?

 

[G-Man]

That is interesting about the "TCJA's sunset in 2025." Yes, it looks to me like under the present rule theHELOC interest is not be deductible if used for anything other than buying or improving the home that is the HELOC's collateral, but if the TCJA expires as scheduled in 2025 then I think your proposal would work.

Based on this link, I think my idea would work if I took a HELOC on the second home in 2026. The HELOC interest would be tax deductible. Maybe someone can confirm as well.

https://www.rocketmortgage.com/learn/are-home-equity-loans-tax-deductible

 

[cathy63]

Thanks for the insight on this. I will check into that.

Also, what about this scenario. You use the HELOC on your primary residence plus a combination of cash to purchase the second home outright in year 2024. Let's assume the value of the second home is $300k and the HELOC amount used were $200k. Since the HELOC was used for the purchase of a second home, the interest is not tax deductible based on my research.


After purchasing the second home outright, now you have $300k worth of equity in the second home. Typically, they will let you borrow up to 80% LTV. That would be $240k. It my outstanding that after the TCJA’s sunset in 2025, if you get a HELOC, the interest on the HELOC is tax deductible no matter what you do with the funds.

So, in 2026, you would get a HELOC on the second home to pay off the HELOC on your primary residence. Now the interest should be tax deductible.

Is my logic correct?

Yes, your logic is correct if the TCJA sunsets. Remember though, Congress doesn't have to just let the entire TCJA sunset; they can write new legislation that reintroduces or extends any part of it. You might look around and see if there's been any discussion about this particular clause. It's not something I'm following, so I have no idea.

You also have to be able to get a big enough HELOC on the vacation home in 2026. There are a number of reasons why your equity value might go down instead of up, so you might not have enough equity to wipe out the first HELOC. If you're buying into a market with a history of stable or increasing prices you're probably o.k. though.

 

[hopefullyoneday]

Most economical way to "own" a second home is just to rent on VRBO, etc.... There are always deals if you look around. You can always, in my experience, find a place for significantly less than the cost of ownership. On the other hand there can be significant non-financial benefits of owning a second home. I contemplate this seemingly daily and so far have been able to talk myself out of it. If we do eventually make the plunge would probably get a traditional mortgage on the vacation home with a significant down payment. For now though we'll keep renting!

Depends on what you are looking for. If you don't like being tied down to one location then your way is the best. We were fortunate enough to buy the place we will eventually retire at. We also purchased it 4 1/2 years ago for 118k now it is worth over 300k so a very good investment. Timing was key though, got lucky.

 

[Sunset]

Thanks for the insight on this. I will check into that.

Also, what about this scenario. You use the HELOC on your primary residence plus a combination of cash to purchase the second home outright in year 2024. Let's assume the value of the second home is $300k and the HELOC amount used were $200k. Since the HELOC was used for the purchase of a second home, the interest is not tax deductible based on my research.


After purchasing the second home outright, now you have $300k worth of equity in the second home. Typically, they will let you borrow up to 80% LTV. That would be $240k. It my outstanding that after the TCJA’s sunset in 2025, if you get a HELOC, the interest on the HELOC is tax deductible no matter what you do with the funds.

So, in 2026, you would get a HELOC on the second home to pay off the HELOC on your primary residence. Now the interest should be tax deductible.

Is my logic correct?

I don't get why wait until 2025. Seems risky to invest/spend based on politicians.

After you buy the 2nd home, you can mortgage it immediately and pay off the 1st HELOC.

Of course you could just buy the 2nd home with cash and get a mortgage.

Could you even deduct the mortgage/HELOC interest cost ?
Assuming a 6% interest rate on $200K , would be ~$12,000 per year. You would need a bunch more in itemized expenses to match the standard deduction of $29,000

Maybe none of it is really deductible. ?

 

[G-Man]

I don't get why wait until 2025. Seems risky to invest/spend based on politicians.

After you buy the 2nd home, you can mortgage it immediately and pay off the 1st HELOC.

Of course you could just buy the 2nd home with cash and get a mortgage.

Could you even deduct the mortgage/HELOC interest cost ?
Assuming a 6% interest rate on $200K , would be ~$12,000 per year. You would need a bunch more in itemized expenses to match the standard deduction of $29,000

Maybe none of it is really deductible. ?

I wasn't sure if you could get a mortgage on a second home that you own outright. I'ts good to know you can.