August 19, 2016 11:59 am

What to Do with a Vacation Home

It’s summertime and many families are using vacation homes for relaxation. However, this isn’t true for everyone. If you own a second home and are no longer content to use it only occasionally for your family, you may want to take action. The type of action you take depends on your personal and financial goals.

1. Rent it out

If you’re looking to make extra money, consider renting your home. You can do this directly or work through a company such as Airbnb. In deciding how long to rent out your vacation property, consider not only the marketplace (e.g., renting a condo by the ocean in the summer or a ski chalet in the winter), but also tax implications:

  • If you rent for 14 days or less, the rent you receive is tax free. However, you cannot take any deductions other than those applicable to any personal vacation home.
  • If you rent for 15 days or more and your personal use (yours and family members who don’t pay a fair rental) exceeds 14 days or 10% of the days rented during the year, the vacation home is treated as a personal residence. As such, you file Schedule E (Form 1040) and report the rent as income but deductible expenses are limited to the extent of the rent.

2. Sell it

If you’re downsizing or seeking income, you sell the vacation home. Your gain is taxed at capital gain rates (15% or 20%, depending on you taxable income). Then you can use the proceeds as you want, such as to create an investment portfolio producing retirement income.

3. Convert it to a primary residence

If you’re selling your main home, you can move into your vacation home for year-round occupancy. Perhaps you no longer need your main home because you’re an empty nester, or the cost of ownership is too high. You can sell your main home, claim the home sale exclusion to avoid tax on gain up to $250,000 ($500,000 for joint filers), and then treat your vacation home as your principal residence.

Taxwise, if you then continue to own and use the vacation home as your principal residence for at least two more years, and then choose to sell, you’ll be eligible to use the home sale exclusion for gain on the sale.

4. Mortgage or remortgage it

If the property has appreciated and you need money, you can take out equity from the property by mortgaging it, or remortgaging it for more than the remaining principal amount. Just note that mortgage rates on a second home typically are higher than on an owner-occupied principal residence. And you’ll have to repay the mortgage, which increases your monthly costs.

5. Transfer it to a charitable remainder trust

If the vacation home has appreciated and you’re seeking income, there’s an alternative to a sale. You can transfer it to a charitable remainder trust, which means you get the income for your life (or the life of you and your spouse) and ultimately the property remaining in the trust passes to a charity you’ve named. After you transfer the vacation home into the trust, the charity can sell it and invest the proceeds for income payable to you. You don’t pay tax on the gain; you get an immediate income tax deduction for the value of the remainder interest that will go to charity. Of course, under this scenario, your heirs get nothing; the charity is the beneficiary.


You vacation home can be a valuable asset. What you do with it is up to you.


Tax Glossary

Defined contribution plan

A retirement plan that pays benefits based on contributions to individual accounts, plus accumulated earnings. Contributions are generally based on a percentage of salary or earned income.

More terms