Berlin, New York, or Grand Cayman, wherever you are buying a vacation home, it is an investment in your family’s future. If you want to grow your asset portfolio, a luxury vacation home is an option. Can you rent out your vacation home?
As an investment, it makes sense as you can recoup expenses and grow additional income. If the house is in the United States, there are numerous tax deductions you can claim.
In this article, we discuss the pros and cons of buying a luxury vacation home, the best places to buy vacation real estate, tax implications for U.S. properties, and whether renting or buying is the smarter option.
Why people buy luxury vacation homes
Some people buy a luxury vacation home for the pleasure it brings, and others serve as an investment. There are countless reasons why people buy luxury vacation homes, and we discuss a few of them.
New York: Photo by Michał Ludwiczak/Pexels
Personal vacation property
It might be less expensive to stay in hotels, but the value of the privacy offered by a personal vacation property, cannot be underestimated. Buying a vacation home in an area you enjoy visiting is a never-ending reward, and it is, of course, the place where you will be spending time with loved ones.
Future retirement home
Even when you travel the world during retirement, it is always nice to have a home base to return to. And the day you feel like a change, it can be sold to either buy another property or cover future living, healthcare, or travel costs.
Photo by Pixabay
Rent it out for an additional income
You don’t have to rent out your vacation home on Airbnb, as there are many vacation rental platforms you can list your property on. When the house décor is of the highest standard, higher rental rates can be charged. The difference between your monthly cost and the rental rate can serve as additional income.
Possible tax deductions
Every country has rules around tax deductions for vacation homes. Whether for personal use or to rent out. Enquire with your tax professional to ensure you get the maximum tax use out of your vacation homeownership.
Berlin: Photo by Shvets Anna/Pexels
Donate its use to a charity auction
When you have a favorite charity, donate your vacation home for use during an auction. Some tax revenue services allow for charitable deductions in this instance. Check with your tax professional.
Use it for employees or clients
When your business owns a luxury vacation home, you could offer it as a retreat for clients or a reward for employees. There might be tax implications if it is used as an employee reward, so clarify this aspect before offering it.
Photo by Asad Photo Maldives/Pexels
Rent it out for a movie
When your home’s character or the area in which it is based is ideal for use in a film or television series, consider renting it out to a production company. Contact your local or regional film commission to connect with film location scouts.
Cons of buying a luxury vacation home
A luxury vacation home can be a source of joy or endless frustration. Although there are many advantages to buying a vacation home, there are also disadvantages. We review some cons to buying a luxury vacation home.
Photo by Jess Loiterton/Pexels
Managing the property
A vacation home requires your time and money, just as your home does. It is a hands-on investment that necessitates work throughout the year. If it is solely for personal use, you will have repairs and maintenance to attend to.
When it is an investment property for renting out, there is the option of appointing a property management company to deal with the day-to-day issues such as marketing, rental contracts, cleaning, and maintenance. But there are always decisions you have the final say in. And with a lot of short-term rentals, the wear and tear on the property can become a liability.
Limitations of short-term rentals
Some areas have a ban on short-term rental of vacation properties, so study the local rental policies before buying. In neighborhoods that allow short-term rentals, there might be strict regulations set by a Homeowners Association, city, or municipality that must be adhered to. It could include acquiring a license with its accompanying expense and administration.
Grand Cayman: Image by Eric Laudonien/Shutterstock
Cash flow challenges
Some people have no problem funding a luxury vacation home. For others, it means acquiring an additional mortgage that might strain their finances. And besides the mortgage payment, there are the standard expenses such as utilities, garden, and other property maintenance. Unexpected repairs such as roof damage or replacement of a hot-water heater can also negatively impact cash flow.
Higher interest rates
It is generally more challenging to qualify for a loan on a secondary residence compared to a primary residence. And these kinds of loans often come with higher interest rates. Some lenders even require a large down payment when providing a loan for an investment property.
Best places to buy vacation real estate in 2022
Buyers of luxury real estate have basic requirements for their property purchase. It must be of high quality and location is important. Whether buying property as an investment or the desire for a better lifestyle, there are some places that are best for buying vacation real estate in 2022.
According to Luxury Portfolio International (LPI), the leading global network of premier luxury real estate brokerages and their top agents, there are ten international locations to invest in this year. When you are looking for the best vacation home locations, consider these areas. In Europe look at Berlin, Milan, and Madrid. Berlin, Germany is a cosmopolitan city with a buzzing nightlife and vibrant culture attracting tech entrepreneurs and young designers.
Milan: Photo by ArtHouse Studio/Pexels
Most popular North American cities for vacation homes: New York City and Los Angeles
Milan, Italy is as always the city of style. Not only is it Italy’s fashion capital, but also its financial capital and the property market are expected to grow strongly. Madrid, Spain is home to the country’s Royal Palace, great architecture, museums, and food. London, United Kingdom is another location to consider when buying a vacation home. International buyers are making their return to the British capital to enjoy the great theatres, art galleries, and architecture.
Dubai, Seoul, Singapore, and Sydney are the next cities to look at for vacation real estate. Dubai, United Arab Emirates, is all about luxuriousness, and international buyers are purchasing local homes. Seoul, South Korea, is the country’s capital, and the Gangnam district with its great restaurants, and high-class boutiques, is the place to buy property. Singapore is a must if you want to be at the heart of the global economy and enjoy busy cities. Sydney, Australia, property prices will continue to rise.
Dubai: Photo by Aleksandar Pasaric/Pexels
Turks & Caicos: No annual property tax
In the Americas, the best places for vacation homes in the city are New York City and Los Angeles. People looking for more temperate climates, proximity to the United States, and low cost of living are choosing to buy in Cabo San Lucas, Grand Cayman, and Providenciales. Buyers are embracing New York City again with its restaurants, bars, museums, and skyscrapers. Property prices in Los Angeles, California, are solid, and with great weather, beaches, and Hollywood, LA is the place to be.
With its Global Citizen Concierge program, Grand Cayman in the Cayman Islands attracts digital nomads and professionals to stay and enjoy the perfect work-life balance. Cabo San Lucas is located on Mexico’s west coast and its favorable climate, golden sand beaches, and towering rock formations make it a great location to consider when buying a vacation home. Providenciales, Turks & Caicos offer amazing blue oceans, no annual real estate property tax, income tax, or restrictions on foreign real estate ownership.
Turks & Caicos: Image by Mark Keast
What does buying a vacation home mean for your taxes
There are always tax implications when you buy a vacation home. The extent of it depends on the location of the home, as every country has its own laws. It is advisable to speak to a professional accountant and real estate attorney to ensure you abide by all tax responsibilities but still get maximum value from any write-offs or concessions.
Can a vacation home be a tax write-off?
If you are buying a vacation home in the United States, you can benefit from tax write-offs when the vacation home is a rental property. If you rent the property out for 14 days or less, you keep all the rental income tax-free. However, you will have to distinguish between personal and rental use on the tax return you file each year should your vacation home be rented out for 14 days or more.
There are numerous vacation rental property tax deductions or write-offs, but do not over-deduct what the Internal Revenue Service (IRS) deems “reasonable”. The most common, reasonable tax write-offs include property taxes, repair costs, utilities, loan interest, property management fees, insurance fees, cleaning and maintenance costs, legal fees, transportation expenses, advertising, and asset depreciation.
Do you need to pay taxes for renting out your vacation home?
Most American states require owners of vacation rental homes to charge and collect state sales and lodging taxes on the income earned from short-term rentals.
Cabo San Lucas: Photo by Efrain Alonso/Pexels
Is it smarter to buy a vacation home or rent?
Is it smarter to buy a vacation home or rent? That depends on your personality, lifestyle choices, investment strategy, and financial position. When you enjoy diverse experiences, renting a vacation home in different locations is exciting. You are not burdened with managing a financial commitment, taxes, or vacation home maintenance. And you do not have belongings to care for, as one would when you own a vacation home. Renting a vacation home is a short-term commitment with low risk.
If you like to spend weekends and vacations in the same location, buying a vacation home makes sense. Especially when you are comforted by having your own belongings around and intend to share the vacation home with family and friends. The vacation home will be a long-term commitment, but managing it will not feel like a burden or risk.
Photo by Rachel Claire/Pexels
Wealth management: Buying a vacation home
When the purpose of a vacation home is to serve as an investment and for personal use, the smarter option is to buy the home. The location of the vacation home is of primary importance. If it is in a sought-after location with a pleasant climate, renting out short-term should not be difficult. You can have year-round occupancy and ask for high rental fees. And since the vacation home is your property, you can choose to rent it out around your vacation needs.
You will have a financial commitment with the accompanying responsibilities, but as a long-term investment, the home becomes an asset rather than a liability. When you make improvements that push up the market value of your vacation home, it could be easier to sell and the profit margin higher. It is a long-term commitment, and the risk depends on the market and your financial position.
A perfect getaway and a great investment
Buy a vacation home when you want an easier entry into the world of luxury real estate investment. As part of an investment strategy, it offers an opportunity to assess the responsibilities and financial requirements, which helps determine whether this is the direction you want to take. And if the market is not optimum for a resale, you can rent the vacation home out or enjoy it yourself. Then move forward with further property investments once you are comfortable with the process.
Regarding Luxury magazine is the leading buyer’s guide for all things luxury lifestyle. We embody the spirit of fine living for the true luxury cognoscenti and highlight everything that is new and trending. Are you buying a vacation home? Contact us today at [email protected]