Can I Rent Out My Second Home?

Most property owners are familiar with the rules of property ownership, but what about a second property? Can I rent out my second home? You may be in luck. Owners of a second home can rent it out from time to time, and the property can still qualify as a second home. This is largely thanks to the rise of apps like Airbnb. Fannie Mae has made this distinction official, making ownership of a second home more attractive because some of your costs can be offset by some rental income. Even better, a second home typically qualifies for a more affordable mortgage with a smaller down payment than a normal investment property would, making ownership of a second home even more accessible to homebuyers.

If you’re interested in purchasing a second home, consider finding a financial advisor to help you fully understand how the purchase fits into your larger investment portfolio.

What Qualifies as a Second Home for Renting?

The IRS defines a second home or residence for tax purposes. In order for your home to qualify as a second home and not an investment property, you must use the property as your personal home for the greater of these requirements:

• 14 days per year
• 10% of the total days rented to others

If you’re getting a mortgage loan on your second home, the lender is likely to have additional requirements to qualify. However, this can vary from lender to lender.

Once you classify your property as a second home for tax purposes and receive approval from your lender, then you’ll need to ensure you meet those requirements long-term. Treating it as a rental or investment property after the fact could open you up to potential liability for fines or additional fees, and you could be investigated for occupancy or mortgage fraud.

Second Home vs. Investment Property

A second home is a one-unit property that the owner uses as a recreational residence for at least part of every year, in addition to their primary residence. An example would be a beach house or a cabin on a lake that you visit a few times a summer.

An investment property, on the other hand, is primarily intended for earning income and creating long-term growth. For instance, this could be a condo that’s rented out for most of the year or a home you fix up and flip.

The classification of second homes or investment properties determines how lenders and the IRS view each type of property. 

Mortgage rates are typically lower for second homes than for investment properties. Additionally, many lenders require less of a down payment on a second home – as low as 10% in some cases.

Taxes for second homes and investment properties are also treated differently. There are two main differences:

• Expenses such as maintenance, utility bills and depreciation can be written off on your taxes for an investment property but not for a second home.
• Mortgage interest is deducted from rental income as part of your expense write-offs with an investment property. On the flip side, it’s deducted along with mortgage insurance or property taxes on a second home.

For both types of properties, you must report all rental income, which is taxable if the property is rented out for at least 14 days per year.

Getting a Mortgage on Your Second Home

The exact rules for obtaining a second home loan vary by lender, but lenders have some general guidelines, including the following:

• Single ownership of the property
• Occupied by the owner for more than 14 days of the year or 10% of the rental period
• A one-unit home
• Can be used year-round
• Is not a full-time rental
• Is not under a timeshare arrangement
• Is not operated by a management firm with control over occupancy
• Is a reasonable distance away from the primary residence (it helps if located in a resort community or area to give the feel of a recreational residence and not a rental property)

If the property you want to buy fails to meet these requirements, you may want to consider making it an investment property, instead. t’s a good idea to speak with a financial advisor or accountant about the implications of doing this on your own.

Costs to Consider When Buying and Renting a Second Home

Before buying a second home, be sure to consider the costs associated with the purchase. 

• Maintenance: You’ll be responsible for basic upkeep, seasonal maintenance and any cleaning or repairs due to rental of the property. Keep in mind that many neighborhoods where these recreational homes are located may have specific upkeep requirements.
• Travel expenses: Since your second home needs to be a bit away from your primary residence and you must be there every year, it is important to factor in travel expenses to and from the property.
• Utilities: You will also need to pay for utilities, even when you’re not there.
• Insurance: You should protect the property from damage, especially when you’ll be away for most of the year.
• Mortgage: Any mortgage you take on your second home should be factored into your overall costs. Your mortgage costs include a down payment and possibly mortgage insurance.
• Property taxes: You’ll have to pay property taxes on the home, regardless of how much time you spend at the property.

Keep in mind that since a second home cannot be rented out as often as an investment property, you may not be able to cover all of these costs from rental income alone.

Tax Tips for Renting Out a Second Home

Renting out your second home can be a great way to offset costs, but it also comes with tax implications. These tax tips can help you stay in compliance while maximizing of your available deductions.

• Reporting rental income: If you rent out your second home for more than 14 days in a year, you must report all rental income on your federal tax return, typically on Schedule E: Supplemental Income and Loss. This applies even if you use a platform like Airbnb or VRBO, which may also issue you a 1099 form for your earnings.
  
• Deductible expenses: When you rent part-time, you can usually deduct expenses directly related to renting the property, such as:
  
  • Cleaning and maintenance
  • Repairs and supplies
  • Advertising and listing fees
  • Property management fees
  • Utilities and insurance (proportional to rental use)

It’s important to note that if you also use the property for personal purposes, you will need to divide utilities and insurance between personal and rental days. If you rent out your property for 14 days or fewer per year, the IRS allows you to keep that income tax-free. You do not need to report it — even if you charge market rates — as long as you use the home personally for more than 14 days or 10% of the rental days.

If your rental situation is more complex, it may be wise to work with a professional. Examples would be if you rent out your second home for part of the year but also make substantial personal use or if you have made significant improvements. A tax or financial advisor can help you navigate how to allocate expenses, understand depreciation rules and minimize your tax liability while staying compliant.

Bottom Line

Lenders have relaxed rules in recent years, making it possible to receive the benefits of buying a second home while offsetting some monthly costs through rental income. You can rent out your second home as long as you live in it for either 14 days per year or 10% of the time you rent it out, whichever is greater.

All other second home rules still apply when getting a loan, such as being over 50 miles from your primary residence and ensuring it is suitable for year-round use. However, buyers can now take advantage of lower down payments and better rates when buying, making it suddenly more attractive to rent out your home.

Ask a financial advisor whether buying and renting a second home is the right decision for you based on your long-term financial objectives.

Tips for Renting Out Your Second Home

• Navigating the process of buying any home, especially a second one, is no small feat. A financial advisor can help you put a financial plan into action. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started today.
• If you’re ready to move forward with buying a second home, the best thing you can do is prepare. You can get ahead of the process by learning about the buying process and understanding how to go about getting a mortgage on your second home. Read SmartAsset’s guide on how to buy a second home to learn more.
• Want to get some insights into the mortgage rate environment? Use SmartAsset’s mortgage comparison tool as your starting point.

Photo credit: iStock.com/andresr, iStock.com/Inside Creative House, iStock.com/Dean Mitchell